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@theMarket: The Case of the Crying Wolf
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Despite these weekly doom and gloom predictions, the markets have weathered the storm. Consider these "end of the world" moments: the U.S. debt ceiling, the budget debate, the lowering of our credit rating; while in Europe there have been dozens of do-or-die deadlines from Greek default to this weeks' EU summit. How long must the wolf cry before we become inured to its call?
The truth is that the media and many of its guests see things in such simplistic terms that either/or is about all they have time for. Real life, as we know, is much more convoluted and complex than that.
Sure, there may come a time when once again (like in 2008-2009), the problems that besiege much of the world's economies will come home to roost. But, if human nature holds true, it won't happen until we least expect it. Since, if we expect something terrible to happen, we will do all we can to avoid or fix it. That process, my dear reader, is what is occurring right now throughout the world.
So if you were thinking that European leaders have finally resolved their financial crisis, think again. Friday's EU agreement moves them another step closer, but we still have a long way to go.
Twenty-six European nations agreed to forge a new treaty in order to establish an even closer fiscal union, one that will force members to get their fiscal house in order or "else." Presumably, "else" would mean that members who fail to toe the line will be booted out of the union. Great Britain, which rejected the Euro in favor of its own currency, the British pound, in the original treaty, was the only member country that refused to join the agreement.
Drafting that agreement, ironing out the fine details, and ultimately passing it should be a guaranteed source of additional volatility as the debate continues. Although the fiscal integrity of several European nations was the source of the financial crisis, this fiscal initiative does little to solve the symptoms of the crisis. Those symptoms - huge debt loads, escalating sovereign interest rates, high unemployment, slowing economies and concern over the Euro — are still of immediate concern.
These worries will be with us for the foreseeable future and, left unaddressed, could sink the markets. But remember, just two weeks ago, several of the world's largest central banks announced their intention to establish a floor under this crisis in the form of massive monetary intervention when necessary.
Over here in America we have our own issues. On the fiscal front, our do-nothing Congress and Senate guarantees there will be no additional economic stimulus unless President Obama can pull something out of his hat that does not need congressional approval. Monetary policy is on hold as the Fed waits for further clues on the economic health of the U.S.
This particular wall of worry is indeed quite formidable. Some investors have decided to just move to the sidelines until this volatile period subsides, and I don't blame them. If concern over your investments is keeping you up at night, you are too aggressively invested, in which case change your allocation.
As I warned in my last column, we saw a lot of volatility in the markets this week. Expect more of the same in the weeks to come. That said, I believe we will move higher between now and the New Year.
Next year, however, may be a different story entirely.
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: It's Your Move America.
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Back in May of this year, in my column ("Gordon Gekko Should Run for Congress"), I pointed out that our nation's elected officials were not subject to the insider trading law that regulated everyone else. As a result, individual politicians and their cronies have profited substantially year after year from the knowledge they picked up in closed door hearings, subcommittees and the like.
This access to insider information has become even more important over the last few years as more and more market moving events are triggered by governmental actions. Just consider how government pronouncements in the U.S. and Europe over the last six months have caused huge market swings.
Efforts to change this law have been going on for years with scant success. News stories such as The Wall Street Journal articles on the subject last year and last month's "60 Minutes" report on the scandal have increased public awareness. I suspect that if their approval ratings were not so low (congress has a historically low 9 percent approval rating) the politicians would simply ignore the heat, as they have done in the past, and continue to profit at our expense.
A month ago only nine congressmen supported the bill that would require elected officials to report all trades over $1,000 within 90 days. After the "60 Minutes" show, that number increased to 180 and more than 20 senators have since jumped on the band wagon.
Today, a cozy relationship exists between politicians, political intelligence firms and big players on Wall Street. There is nothing illegal in a congressman or senator divulging sensitive information to a political intelligence firm which in turn sells that information to Wall Street. The more market-sensitive information that is passed on through the pipeline, the more a particular politician can demand in future campaign contributions from the beneficiaries of that information.
This bill would make it illegal for individuals and "political intelligence firms" to continue that practice. It would also require firms and individuals involved in "political intelligence" to register just like any other federal lobbyist.
Call me a cynic, but I doubt this bill will pass. Not only are lawmaker's potential for using their office for personal gain at stake, but this bill will also jeopardize the pipeline to campaign funds from those special interests we hear so much about.
In a different world, all my readers and everyone in America who cares (the 99 percent), will call or email their representatives in Washington and demand he or she vote for this bill when it comes up for a vote next week. It is your chance to change a lot of what is wrong with Wall Street right now. It's your move, America.
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: Central Banks Backstop Global Economies, Again
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Before the markets opened, central banks of the U.S., Canada, England, Switzerland, Japan and Europe announced a plan to provide cheap dollar loans to European banks and other institutions, reminiscent of the actions they took after the Lehman Brothers bankruptcy in 2008. This action, like that of 2008, puts all investors on notice that the world's central bankers have no intention of letting Europe go down in flames anytime soon. It is a lesson we should have learned by now after three years of government intervention in capital markets.
Clearly, the week was shaping up to be another dismal episode in the European crisis, despite Monday's 3 percent rally. The S&P credit agency had lowered the credit ratings on a slew of banks. European sovereign bond prices continued to plummet and rumors abounded of a possible bank failure somewhere in Europe as early as December. The news came in the nick of time.
And time is the one commodity that is most in demand among Europe's leaders. Make no mistake; this latest action by the central banks is a stopgap measure. It is intended to give European nations the time to come up with a solution to their crisis. It is not a panacea that will fix the PIGS, Italy or Spain's faltering economies and enormous debtload.
Think back to our own Federal Reserves' actions over the last few years. The bank has continuously injected liquidity into our market through a variety of tools including lower interesting rates, buying bonds, and delving into the credit and mortgage markets directly. Its efforts continue today and are designed to keep the financial markets from collapsing, giving the government and private sector vital breathing room to dig the economy out of a recession.
How has that worked for us?
In my opinion, their actions avoided a total collapse of financial markets, averted another Great Depression, kept unemployment from climbing even higher than it could have been, and restored confidence among investors. Where the ball has been fumbled is among our private and public sectors.
Our government's inability to respond to slow growth, high debt and high unemployment is a failure of our politicians. Private companies have also failed by hoarding cash, refusing to lend and bolstering profits by avoiding new hiring while working existing employees to death. Bottom line, our leaders have frittered away a lot of the time the Fed has given us.
The question: will Europe repeat the mistakes of our leaders or will they use this time to actually come up with solutions to their economic problems?
The challenges are great and in many ways even deeper and more difficult to solve. Their debt issues are with countries as well as banks. Unlike the U.S. dollar, their currency is in jeopardy. Governments are in far worse shape than they were two years ago and there are serious political and economic contradictions within the European Community.
One might dismiss their chances, given the embarrassing and inept handling of the crisis that has already dragged on for two years. I believe that the central bank actions have granted Europe and world markets a temporary reprieve and I fully expect Europe to respond positively to this gift.
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: Merkel Versus the Markets
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Germany's Chancellor Angela Merkel agrees change is necessary but not the kind the markets want. Her nation insists that good old-fashioned fiscal austerity will solve Europe's problems over time. Investors believe that while that is a laudable goal, it will not do anything to solve the immediate problems of the "too big to fail" nations such as Italy and Spain.
Over the last two weeks the flow of positive comments from European leaders who keep promising a definitive solution has subsided. During that time it has become clear that Germany is unwilling to go along with the majority of EU member nations that want the European Central Bank to act as lender of last resort. As a result, the price of European debt and equities has declined while interest rates have reached untenable levels in Italy and Spain. Even German sovereign debt is not immune. This week's 10-year note auction was woefully undersubscribed with only 65 percent of the issue taken up by investors.
Over the last month I have written that the "she said, he said" strategy of talking the markets up while trying to come up with a solution to the Euro Zone problem would only work for a short time. Without a substantive plan to bail out Italy and Spain, et al, investors would lose patience with Euro Speak. That is now happening and the best that Europe's leaders could come up with is to promise not to criticize each other in public.
The bottom line is that Germany is the largest, wealthiest, most politically stable member of the EU. It owes that success, in part, to the Euro. Its economy has benefited mightily from the currency. Today, without Germany, there would be no European Union and the Germans know it.
As such, the Germans insist that there will be no U.S. Fed–style bailout of European nations with the accompanying risk of hyperinflation. It was never part of their vision. Some believe that they would rather see the EU dissolve first. It appears the markets are intent on forcing Chancellor Merkel into deciding which is most important — Germany's principles or the EU.
In the meantime, the U.S. markets are deeply oversold. So it was no surprise that Friday's holiday-shortened session experienced a bounce in the averages. Investors, after days of Europe mania, focused instead on America and its Black Friday weekend consumer spending spree. The markets are hoping that consumers will forget their woes this weekend and spend, spend, spend.
I do believe there will be a boost to retail spending this year, but after the smoke and hype clears out, the revenue numbers will not be as high as some predict. If spending follows the trend of last year, expect a boost in sales for the holidays now, followed by a decline before picking up again just before Christmas.
I am expecting a nice bounce in the markets into the end of the year. Granted, the averages have gone the other way since last week and have retraced two thirds of October's gains so far this month. Let's hope December lives up to its name as the best month in the year for stocks.
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.
The Independent Investor: Best Avenues to Save For Retirement
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Back in the day, before the advent of government-sponsored savings plans, defined benefit pension plans and the odd annuity were the only investment vehicles available to me. As a young stud on Wall Street, it didn't matter. Retirement saving was for others. I would live forever, make millions in the market and retire when I was 30. Fortunately, I woke up to the realities of the real world and started saving early in my career. You should, too.
In fact, the earlier you recognize that saving for retirement regularly is a no-brainer, the easier it will be to retire. So let's say you recognize that and want to start saving. The choices today can seem overwhelming. Start with the obvious: tax deferred plans where the U.S. government gives you a tax break. There are traditional IRAs, Roth IRAs, employee 401(k) s, 403(B)s, 457 plans, deferred annuities and many more. In my opinion, if you have earned income and your employer offers some kind of tax-deferred plan, that is where you should concentrate.
Any financial planner will tell you to try and take maximum advantage of the amount you can save in your tax-deferred plan. That would be $16,600 a year in a 401(k), 403(b) and 457 plan and $5,000 in a traditional IRA or Roth IRA. For those over 50 years old, an additional "catch-up" amount of $1,000 a year in your IRA is allowed and $5,500 in your 401(k), 403(b) and 457.
Yet, few of us make enough to contribute the maximum. Instead, the best place to start is your employer plan, especially if it offers a matching contribution to your own. As an example, let’s say you make $50,000/year and your employer will match 3 percent of your salary ($1,500). It doesn’t take rocket science to figure out that you should put your first $1,500 of savings into your tax deferred employee program since your company is matching that amount as a free employee benefit.
But let's say you want (and can afford) to save even more, possibly an additional $5,000. Should you just put it into your company's 403(b) or 401(k) plan or open a traditional, tax-deferred IRA? In my opinion, you should open an IRA. Here's why.
Both contributions are treated equally (i.e. tax deductible) by the Federal government. However, your company's retirement plan will offer a limited number of investment choices. In addition, the fees you pay for investing in your company’s plan are quite high compared to opening your own IRA. Although you can't contribute as much in your IRA, you have much more control over what to invest in and at a lower cost.
There is one caveat, however, if you are contributing to both your traditional IRA and your company plan: at a certain salary level (above $56,000-$66,000) the amount you can contribute as a single taxpayer to a traditional IRA is reduced. For those married couples who file jointly the phase-out range for deductibility of your salary is higher ($90,000-$110,000). If your spouse does not participate in a qualified employer plan but you do, then the cutoff level for your spouse becomes $169,000 to $179,000 if filing jointly.
You can also put your IRA contribution into a Roth IRA but remember, a Roth is not a tax-deductible IRA. However, qualified withdrawals are tax-free while in traditional IRAs withdrawals are taxed as ordinary income. And like traditional IRAs, the Roth contribution is $5,000 yearly and phase-out salary limits also apply.
I suspect most of you will already be tapped out if you contribute the full Monty to both your employer plan as well as a traditional IRA, but in some cases a Roth might work better for you. If you still have money to save, then I suggest you give me a call and we can discuss how best to deploy it.
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.
