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@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.
The Independent Investor: 'Sell in May and Go Away?'
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Back in July 2008, I wrote in "Myths of the Market":
The most convenient thing for all of us would be to cash in our chips, get to the sidelines and enjoy our summer. If you had done so in 2010, you would have missed a meager 1 percent gain in the markets between April 30 and Oct. 31. In 2011, you would have dodged a 6.7 percent slump in the averages. But markets usually do what is most inconvenient for the greatest number of investors.
A recent report from Ned Davis Research pointed out that the Selling May strategy doesn't work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4 percent gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6 percent).
Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pullback is what differs.
Usually, a summer rally occurs after the second quarter sell-off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pullack in the fall was mild, followed by a strong gain into the end of the year.
The explanation for the differences in these presidential election-year markets comes down to uncertainty. That uncertainty is compounded when the economy has been weak, as it is now. Leadership in times like these is extremely important to market investors. Some would argue that the incumbent (the devil you know) is preferable to one you don't know, who may or may not, usher in successful policy changes. The presidential candidate's party affiliation did not appear to have any bearing on the results.
So the moral of this tale is that there may still be a sell-off between now and the end of June, but politics will have an inordinate influence on what happens this summer and fall.
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: Fly Me To The Moon
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"I don't get it," said a reader on Friday morning. He was sure that the markets would crater on the back of a disappointing Gross Domestic Product number for America's first quarter. The data indicated our economy slowed from last quarter's 3 percent growth rate to 2.2 percent.
"Not only was the U.S. market up, but so was the Spanish market. That doesn't make any sense. Will you help me out here?" he asked
It is true that S&P, the credit agency, downgraded Spanish sovereign debt Thursday night by two notches from A to BBB-plus. S&P believes that Spain’s budget deficit is going to worsen based on further declines in their economy. In a different era our reader would have been correct in anticipating a downdraft in Spain’s stock market, but not in this environment.
Investors took the initial decline in their stock market as another buying opportunity. By the time the U.S. opened on Friday the Spanish market was up by almost one percent. So what makes weak economic data, whether in the U.S. or Spain such an opportunity for investors?
Investors are conditioned to believe (after two and a half quantitative easings here at home and the on-going monetary stimulus in Europe) that the weaker the data becomes the higher the probability that the governments will step in and save us. Thus, the worse the news becomes, the better it is for the future of the stock market. There is plenty of precedent to believe that.
Just look back at what has happened every time our government-influenced stop and start economy began to slow over the past few years. The cycle began with the first stimulus package combined with central bank monetary stimulus (QE I). For a short time the stock markets skyrocketed, the economy grew and unemployment began to decline. But as QE 1 waned so did the economy, and with it the stock market.
The Fed waited and hoped the slowdown was simply a blip but in the end the negative data forced the Fed to launch another program (QE II). Once again the economy and the markets reacted by moving higher. But here we are again. The economy is slowing and investors are expecting the Fed to bring a new punch bowl to the party.
Will the Fed cooperate? Yes, at some point if necessary. QE III is not on the table quite yet and may never be if the economy can find legs of its own. But if the economy and unemployment begin to slow further then we can expect another save by the Fed. Of course, the devil is in the details. The key words to focus on are "if" and "further." Those words appear to represent one thing to the Fed and another to investors.
At this point, no one (including the Fed) really knows if the country is in a sustainable recovery. Investors who expect the Fed to launch QE III because the economy declined .80 basis points in one quarter are smoking something. In each of the prior cases of Fed easing the stock markets and the economy had to stall dramatically before the next round was launched.
You might recall that in each case we had to suffer an 18-23% stock market decline before the Fed stepped in to save us. If those same investors expect the Fed to ease with the stock markets approaching the year’s highs then once again, give me some of what you’re smoking.
Yet, in my opinion, that's what the markets are betting on. If we look back at the month to date, we could argue that the markets gave us the 5 percent correction we had been looking for and are now poised to move higher. A contrarian indicator like bearish market sentiment is rising. Dips are being purchased once again and momentum seems to be on the side of the bulls for now.
I'm thinking we could run another couple of percent here on the S&P 500 Index, at least to 1,420 or maybe as high as 1,450 over the next few days or weeks. If you are nimble, you might be able to take advantage of that move. If, on the other hand, in-and-out trading is not your style than just stay where you are and enjoy the fireworks.
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: Not In My Back Yard
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The oil and gas boom in this country has had some serious side effects. Everything from earthquakes to polluted water has been blamed on the industry. Residents near the areas of hydraulic drilling and exploration are fighting back using the Environmental Protection Agency, lawsuits, lobbying and the media. The challenge is separating fact from fiction in this on-going fight.
There is no question that there has been a remarkable increase in the number of earthquakes in the middle of the country, for example, or that an entire neighborhood of homes in Dimock, Pa., claimed it was threatened with explosive levels of methane gas. Twenty water wells in the same area, the site of natural gas drilling in the Marcellus Shale, showed the presence of sodium, methane, chromium or bacteria.
A recent documentary, "Gasland," on HBO featured another Pennsylvania village caught in the controversy over America's oil and natural gas boom. The movie allegedly uncovered the "secrets, lies and contamination" of natural gas drilling. As a result of the growing controversy three states — New Jersey, New York and Pennsylvania — have called a moratorium on any further drilling or hydraulic fracturing for the time being. That is a big deal because the Marcellus Shale sits below those states and has enough natural gas to fuel this country for the next 20 years.
Environmentalists and people living near drilling sites are saying not in my back yard. They believe that attitude is justified since the risks are great and who can blame them? I'm sure I would feel the same way if someone proposed to drill a well in the parking lot of my condo. The moratorium is needed, so its advocates argue, simply to study the impact of this drilling before people get hurt or sick. Naturally, the energy industry is arguing that the risks are small and that thousands upon thousands of wells have been drilled with no negative impact whatsoever. They have a point.
Take the earthquake issue, where a study by the U.S. Geological Survey identified a sixfold increase in manmade quakes in an area including Arkansas, Colorado, Oklahoma, New Mexico and Texas. All the headlines pointed to natural gas drilling as the culprit. The gas guys were found guilty, strung up and buried before the survey team could come to a conclusion. Only then did the scientists admit that the quakes were not directly caused by hydraulic fracturing with one exception, one lone well in Arkansas.
The 20 "contaminated" wells in Pennsylvania I mentioned were later found by the EPA to present no threat to human health and the environment. As for the earth beneath the affected homes in Dimock, it did contain methane among other elements, but the EPA could not prove a connection between the contaminants and the oil and gas developments. In fact, they concluded that the presence of these elements could just as easily have been caused by naturally-occurring background levels or other unrelated activities.
I have learned that most studies tend to reflect the bias of those conducting them. In other words, you can make a study say anything you want given enough samples. This battle, in my opinion, has already been won by the weight of public opinion. A cessation of exploration will have a negative impact on the economies of all three states. At the same time, the declining price of gas will not justify continued drilling in a land of litigation.
Free market capitalists might moan and argue that a person has the right to do whatever he wants with his property including fracking. On the other side, advocates will contend (rightfully so) that there is no such thing as zero-impact drilling. One's decision to allow fracking in your backyard can and does directly impact my property next door.
The industry heightens the paranoia surrounding it by refusing to disclose what potentially toxic chemicals (if any) are used in the drilling process. The regulations do not require disclosure so they won't provide it. They are also exempt from EPA regulation thanks to the Bush Administration's 2005 loophole legislation dubbed the "Halliburton Loophole" by opponents.
As a result, all sorts of fears can be invoked (real or imagined) by any blogger or tree-hugging anarchist that wants to invent their own bizarre plot against humanity. Is the nation's watershed in jeopardy of contamination? Many environmentalists claim it could be impacting millions of unsuspecting Americans. Without the data, we don't know. Others worry that in the vacuum caused by the absence of federal regulation, undermanned and revenue starved state regulators are turning a blind eye to industry regulation.
Back in the day, when the United States was still a powerhouse of industry, a growing and vocal group of concerned citizens began uncovering the seamier side of this formidable industrial base. We discovered that the byproducts of these industries were causing enormous amounts of air and groundwater pollution. At the same time, workers were coming down with all sorts of ailments from asbestos poisoning to cancer. Instead of helping the industrial sector transform itself into something more acceptable, we drove it away.
Politicians swooped in to pass bill after bill creating new safety standards, stricter codes and of course higher taxes on these bad boy industries. Industrial companies found themselves spending more time and money defending their practices from lawsuits, sit-ins and protests. In the end it wasn't worth it. They started looking for less hostile manufacturing locations abroad and found them.
Americans today lament the loss of that U.S. industrial base. We conveniently forget that part of the reason for that exodus was caused by a sea change in how we viewed those industries. Although the present challenges facing further gas drilling in our country should be taken seriously, let's try not to apply the same "not in my back yard" attitude toward gas drilling that sent our industrial base packing in the past.
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: The Gas Rush
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As recently as five years ago in the U.S., natural gas was in short supply using traditional exploration and drilling methods. Then, engineers had a breakthrough. Two key technologies were discovered — horizontal drilling and hydraulic fracturing (fracking) — were discovered. Horizontal drilling allows gas developers to drill vertical wells that turn and snake more than a mile sideways under the ground. Fracking, which was actually invented more than 60 years ago, involves pumping millions of gallons of chemically-treated water into deep shale formations at enormous pressure. The fluid cracks or widens existing cracks in the shale freeing hydrocarbons to flow toward the well.
As a result of these technologies, vast caches of natural gas trapped in deeply buried rock have been made accessible leading to an eightfold increase in shale gas production. One of these deposits, the Marcellus Shale sprawls beneath West Virginia, Pennsylvania and New York. This deposit alone could produce enough energy to fuel every natural gas fueled device in the nation for the next 20 years.
Natural gas prices have plummeted as a result of all this new supply and are now trading at 10-year lows ($1.94 per 1,000 cubic feet). The prognosis by experts is that prices aren't going to rise anytime soon since there is so much gas still in the ground that the energy industry, policy makers, economists and natural gas customers can't figure out what to do with it.
It has already been a great boom to both residential and commercial users of the fuel. The typical consumers spent $868 on average this winter, a 17 percent decline from last year. Utilities that generate electric power consume 34 percent of the nation's natural gas output. Decline in gas prices are being passed through to customers, who are beginning to see their utility bills decline throughout the Northeast.
Another 30 percent of natural gas is consumed by industries to heat boilers or make chemicals, fertilizers and plastics. Prices have come down and supplies have reached a level that major corporations are announcing large-scale expansion projects close to the sources of these new natural gas discoveries.
Dow Chemical has announced plans to build a multibillion-dollar plant to convert natural gas into the building blocks of plastic in Freeport, Texas. Royal Dutch Shell is building a similar $2 billion chemicals plant near Pittsburg, Pa., close to the output from the Marcellus Shale. These are but two of 30 chemical plant projects that are ear-marked for the U.S. over the next five years.
Steel and iron producers are also excited at the prospect of saving over $11 billion annually through 2025. Steel maker Nucor is switching from coking coal to natural gas production of their iron products in a new $750 million plant in Louisiana. The trucking industry that now consumes just 0.1 percent of natural gas production is looking at a crash program to build natural gas refueling stations along America's Interstate Highway System to refuel new long-haul trucks that will burn natural gas.
All of this expansion means jobs. Economists predict as many as 500,000 new jobs by 2025. At the same time, if we can build the infrastructure to transport and convert our nation's existing oil-based economy to consuming natural gas over the long run, we no longer need fear turmoil in the Middle East. The whims of OPEC will be a thing of the past. At the very least, America could join the league of energy producers/exporters and begin to export our surplus gas to foreign buyers. Europe, for example, pays 75 percent more for their natural gas than we do.
All of this sounds wonderful, yet there is a darker side to this "Gas Rush." Homeowners across the nation in those regions where natural gas is being exploited have witnessed their once-pristine communities become industrial sites. In place of their willow trees or pastures, sprawling plants lit by huge flares late into the night blotting out the moon and stars.
Trucks rumble through neighborhoods spewing noxious fumes that mingle with other possibly toxic substances. Neighbors keep children and pets behind fences away from containment ponds filled with unknown chemicals. They worry about the drinking water and hold their breath as earthquakes make the windows and china tremble where no such quakes had occurred before.
In our next column, we will examine the darker lining within this pink cloud of natural gas abundance. Opponents of fracking argue that the risks outweigh the rewards in any further development of natural gas. Here we are on the verge of a possible renaissance in American manufacturing and yet New York, New Jersey and an increasing number of municipalities and local governments are ordering a halt to further development.
Is that wise or is America once again shooting itself in the foot? What do you say?
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.
