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@theMarket: Europe Downgrades Hit Markets
After a week of slowly grinding higher on exceptionally low volume, the markets swooned on Friday. Europe, once again, was responsible.It was almost comical to watch the talking heads this week as they tried to make a case that the U.S. markets were decoupling from the troubles in Europe. They highlighted the increasingly positive economic data, the possibility of quarterly earnings surprises and the hope that the Fed was preparing for another round of quantitative easing.
My take is that Europe has a longer holiday season than we do. Their movers and shakers just got back to work this week. We haven't decoupled. There was simply an absence of market making news until this week.
All of that decoupling talk disappeared on Friday as a rumor surfaced that credit rating agency Standard & Poor's was ready to downgrade a slew of European countries this weekend. At the same time, JPMorgan's revenues disappointed the market in their earnings announcement, sending the entire financial sector into a tailspin. Retail sales for December (as I predicted) also disappointed the markets. The holiday season failed to live up to retailers' expectations triggering fears that future economic growth was in jeopardy.
My advice to readers is to ignore all these one-off events. The simple truth is that we have benefited from A) The Santa Claus Rally and B) the January Effect. In my last few columns, I explained both and predicted the markets would rally as a result. Both A and B came off like clockwork and are now about over, leaving the markets vulnerable to a pullback.
I'm not looking for anything disastrous to develop, outside of a normal two-steps-forward, one-step-back kind of decline. There are too many positive developments for me to become overly bearish.
Both Italy and Spain managed to sell 17 billion worth of sovereign debt ($21.5 billion) this week without too much trouble. That was a vast improvement over last month when few players were willing to even look at buying bonds from these countries. The European Central Bank left rates unchanged, leaving the door open for possible rate cuts in the future. Even Greece, the bad boy of Europe, is stumbling towards a debt deal in their typical on-again, off-again fashion.
There is also a lot of talk about the possibility that the Fed will launch QE 3 sometime in the next few months. This is partially a result of some dovish-sounding speeches from several Fed members lately. I have my doubts. As long as U.S. economic data continues to improve, I don't think the Fed sees the need for additional monetary stimulus right now.
Of course, we are in an election year and sitting presidents in the past have been known to "lean" on the chairman of the Federal Reserve to goose the economy as November approaches. I think it is still too soon for that kind of monetary monkey business before the elections. But it does help buoy the mood of investors so we will put that in the plus column.
In summary, the markets will pull back and then go higher. That will be a trend I expect will continue for the next several months. I'm not looking for big gains, just a general trending higher by the indexes, interrupted by pullbacks on a periodic basis. The upside could lift the S&P 500 Index to the 1,350 level but from here that's no more than a 5 percent gain from here. As such, we will keep one foot in dividend paying stocks and the other in the fixed income market. In other words stay defensive.
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: How The Fed Beat The Market Last Year
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The Fed's net income was actually down from a record breaking $81.7 billion profit in 2010 on its $2.9 trillion investment portfolio. Still, they did better than the S&P 500 Index, although not as well as the Dow last year.
The real question is how much risk the Fed is taking in relation to return. It appears that on the metric the Fed is taking on more and more risk to generate a return that is under the "riskless" 3 percent return of a 30-year U.S. Treasury bond.
Take the mortgage market, for example. Over the last three years, The Fed has bet $1.25 trillion that its efforts could turn around housing in America. That bet hasn't panned out. Since they started buying mortgage backed bonds in the beginning of 2009, the value of the housing market has declined 4.1 percent.
Rather than pull in their horns, the Fed is buying another $200 billion more in 2012. That amounts to 20 percent of all new mortgage loans. That may just be a beginning, if you can believe some Fed officials. They indicate the central bank could buy two or three times that amount.
The Fed normally makes its money from interest earned on U.S. Treasury bonds, federal agency debt and securities held by firms such as Fannie Mae and Freddie Mac. That sounds tame enough, but that is not the entire story. By the nature of its charter, the Fed is supposed to deal in risky assets from time to time. Like Star Trek, their mission may be "to boldly go where no man has gone before."
The Fed is a classic buy at the low investor lending money and investing when no one else will. During the financial crisis, when banks, corporations and even countries were experiencing a free fall in prices in all their financial securities, the Fed was the buyer of last resort.
Yet, today, even some of the most sophisticated Americans have it in their head that the Fed uses taxpayer money in its operations. Even the Wall Street Journal reported in a recent story, "Fed's Lofty Profit Becomes Treasury's Gain" that "The central bank has come under attack for taking too many risks with taxpayer money ... ." The facts are that the Fed actually contributes to the pool of taxpayer funds and will continue to do so whenever possible.
Since the Federal Reserve Bank has the power to create money, it does not need to borrow money from, or use taxpayer money. Sure, the Fed might lose money at some point if inflation suddenly spiked and it needed to pay higher interest on bank reserves. If things really got messy and it needed to sell some of its government bonds, it might suffer a loss but those would be, at worst, temporary issues.
Remember, too, that the Fed is both a buyer and a seller with a far longer time horizon than the markets. Its mission is to administer interest rate policy and insure that unemployment does not get too far out of whack. As such, it creates and controls interest rates to a large extent and can create over time an economic environment conducive to those goals.
There is a reason that investors worldwide don't bet against the Fed. Although profits are fairly far down on the list of the Fed's agenda, because of the nature of their objectives, it is more than likely that they will turn a profit as long as they continue to buy low and sell high.
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.
At The Market: Tug Of War
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As expected, the good news coming out of the U.S. economy has encouraged investors, while higher yields on Italian sovereign debt provided a counterweight that leaves the markets in a tug of war. The lack of news out of Europe allows investors to pay more attention to American data, such as the drop in the unemployment rate to 8.5% from 9.4% this time last year.
Beginning next week, however, European players should be back from their chalets in Switzerland or Spain and the fun begins all over again. At the same time, we face another earnings season and if earnings are not up to investor expectations we could definitely see a sell off.
Alcoa, the aluminum maker, kicks off the earnings season after the close on Monday and the company has already warned that higher costs and declining prices are threatening profits. Retailers admitted that Christmas sales were not as strong as they had hoped. I had warned readers not to fall prey to the holiday season hype on how great Christmas sales would be for retailers. Those who did best were those that offered thrifty consumers massive discounts off list price.
Short term, absent any new positive developments out of Europe, we could see some profit taking in the weeks ahead. That should be no surprise to investors, given my outlook for 2012. In my column "2012 could be another up and down year" I outlined the risks and opportunities we face this year. To sum up, I expect a choppy first half with a possible 'sell in May and go away' scenario. The second half could be better, thanks to election excitement and hope for a more functional Congress and Senate.
I also warned that any number of unknown events ranging from what happens in Europe, The Fed's monetary policy, and actions (or non-action) out of Washington could make any forecasts, including my own, worthless.
Take, for example, this week's rumor (later denied by the White House) that the Obama Administration is planning a mega refinancing ($1-$3 trillion) of the American mortgage market.
Back in September, I wrote in "What the Markets Missed" that such a plan was being debated within the White House. The program would not require congressional approval and could be conducted largely through the Fed, the FHA, Fannie Mae and Freddie Mac. It is an election year, after all, when the sitting President will do all he can to stimulate the economy before the elections. That type of left field developments has the power to dramatically alter the market's expectations.
The cross currents within the markets remain. As such, I will stay defensive with a large percentage of my portfolio sitting in bonds and dividend yielding stock funds. I will let the markets dictate my next move or when to become more aggressive. In the meantime, expect volatility.
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: 2012 Could Be Another Up & Down Year
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This year a lot can happen. So much depends on forces outside our control that predicting the markets will be up (or down) X percent by year end would be criminal at best. Instead, I would like to broadly outline the possibilities and risks we face in the months ahead and how best to play them.
As I predicted, we are currently in a rally that began before Christmas and should extend for the next few weeks if not months. I don't think we will hit any new highs during this period or if we do it won't be until April. Europe will most likely continue to dominate the news, so we should continue to experience quite a bit of volatility. Be prepared for the 1-3 percent up days followed by the same or more on the down days.
I believe that ultimately Europe will get its house in order but between here and there the markets will be quite choppy. A foot in both the equity and bond markets should play best in that environment. Stick with dividend and large cap stocks and defensive sectors in this period along with corporate and high yield bonds and short-term paper.
Although the U.S. economy continues to improve, it is nothing to write home about. Without additional help from the do-nothings in Washington or an end-run by the president around Congress, unemployment will remain high and growth between 1.5-2.5 percent. That is an optimistic scenario, which assumes that a European recession is inevitable but at the same time contained to their side of the ocean.
If, on the other hand, it appears that Europe's recession is spreading globally then all bets are off. Remember too that stock markets sell first and collect the facts later in this day and age. Just a hint that something like that is in the cards would be enough for a major sell-off in world markets. Therefore it wouldn't surprise me if we have a classic "sell in May (or April) and go away" scenario this year.
Granted that would be a worse-case scenario but one we must all be prepared for. Further hiccups in Europe, fear of renewed recession here at home without further monetary or fiscal stimulus from the Fed or White House could spook sending the S&P 500 Index back towards its 2011 lows at 1,100. Granted, that would be a worse case scenario but one we must all be prepared for. A switch to all bonds would be best in that case.
But remember, we are also in an election year and markets usually begin to anticipate that in the second half of the year. This could give investors an opportunity once again to buy the dip. If history is any guide, the Obama administration will want to do anything and everything they can to boost the economy going into the November election. This year that argument should carry additional weight since both parties are campaigning on the economy and unemployment.
In that case, we could see a major move higher in the averages off the bottom this summer that could move the U.S. market to substantial gains by the end of the year and into 2014. Now, wouldn't that be nice?
If some or most of my forecasts come true for this year, it is quite obvious that a buy and hold strategy will be a recipe for disaster as will all cash, all bonds or all stocks. There will be times during the year investors will want to be both aggressive and defensive and it will be a lot of work, just like last year. There is an old saying that "if you can't stand the heat, get out of the kitchen" or in this case, hire a money manager that can make those decisions for you, but be sure you pick the right one.
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: Resistance
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"I always sell my equity positions whenever the S&P 500 Index trades below the 200 Day," says a trader friend of mine, "and I don't buy back until it rises above that level again and stays there for more than a week."
It is a rule of thumb that has worked for market timers (those who try to sell the rips and buy the dips) more times than not since 2007, but it is not foolproof. There have been times in the past when stocks fell below that level only to rebound and continue much higher. Nevertheless, many traders take the 200 DMA very seriously. As a result you should too.
Every index has a 200 DMA whether you are looking at stocks, bonds or commodities. Most investors focus on the S&P 500 as their key average when trying to read the tea leaves in the stock market. Today, the 200 DMA is trading roughly at the same level that marks a gain or a loss for the S&P for 2011. The S&P Index started the year at 1,257.64.
The 200 DMA is right now about 1,259 (although it will change since it is a moving average). Several times over the last few months bulls have attempted to break that line, but the resistance has been fierce. Each time the bears have thrown back the bulls' advance decisively. So here we are again at the resistance line, but the Santa Claus rally has been fairly weak and prices have advanced on low volume.
Clearly, there is little we can read from the closing values of the S&P Index for the year. Given the enormous volatility investors have experienced, a gain or loss of 3-4 points and a close above or slightly under the 200 DMA is meaningless. It gives no guidelines for what will happen next.
On the bright side, the U.S. has done much better than other global markets. The main markets in Europe have suffered their worst losses since 2008, thanks to the continuing financial crisis. In Asia, the once-hot Chinese market dropped 21 percent for the year while Japan had its lowest close since 1982.
Their performance reflected a year that was plagued with natural disasters from earthquakes to floods, the Arab spring, trading scandals, wild rides in commodity, the complete dissolution of political leadership on both sides of the Atlantic and a continual widening between the "haves" and "have nots" around the world.
Bond prices, especially in our U.S. Treasury markets, were one area of positive gains. Prices continued to rise, despite the downgrading of our sovereign debt. Investors, spooked by the gyrations in the stock markets, flocked to this perceived safe haven. However, thanks to the low rates of interest, yields in that market have in some cases turned negative, such as Treasury Inflation Indexed bonds (called TIPs).
Today, a 30-year Treasury bond is yielding 2.9 percent while the Consumer Price Index, the nation's inflation gauge, has been running at a rate above 3 percent. At those rates, retirees who need income to simply stay afloat are not even breaking even with inflation.
I find it impressive that, despite the gut-wrenching turmoil, the U.S. stock market has held its own and is finishing even-to-up in the case of the S&P 500 and the Dow. It appears most of the bad news of 2011 has been discounted. Who knows, we may actually break that resistance and climb above the 200 DMA on the S&P 500. That may turn out to be my "famous last words" but I remain somewhat optimistic.
Despite the unknowns, I sincerely wish all of you the same joy and happiness you have given me this year. Happy New Year!
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.
