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@theMarket: Bottoming Out
One could tend to dismiss this week's market move as just another short-covering rally triggered by unsubstantiated rumors from Europe. Friday's sell-off in the face of fairly good unemployment data bolsters that premise. So why do I feel we have further to go on the upside?Call it a feeling; call it a hunch, but the market's action over the last week or so makes me think that the rally is not quite over. I noticed that during our recent break of the 1,100 level of the S&P 500 Index (The Low) on Oct. 4, the number of new lows was less than the number of new lows in stock prices registered on Aug. 8. And on that same day, the number of stocks above their 200-day moving average reached a low of 7 percent. On Oct. 4, we registered the same 7 percent low (but no more), putting in a "double bottom." This is a bullish sign.
At the same time, the CBOE Volatility Index (VIX), the investor fear barometer, failed to break out to new highs, despite a lower low in the market. Finally, despite the string of bad news out of Europe, many of the European indexes did not make new lows. Now I know that all this is a bunch of mumbo jumbo to most of my readers. That's OK.
The takeaway is that the internals of this market are starting to show some positive divergences. At the very least, I would not be shorting this market quite yet if I were you. Certain European leaders are making noises that sound like some kind of definitive deal is in the works to resolve the financial crisis among its members.
Stateside, the economic data seems to be turning neutral as opposed to negative. Weekly retail sales were a positive surprise, the economy gained more jobs than expected and there is an outside chance that investors are too negative on the upcoming earnings season.
Now, a little more upside does not mean that the correction is over. We are in a bottoming process. That could take a few more weeks to resolve. I recently wrote a column ("Should you be worried about October?") in which I explained that "September is usually the month where crashes occur and October is the month that ends them."
Our recent low on the S&P 500 was 1,074.77. Could we break that low? Sure we could, but I would be a buyer if we did. Predicting the actual bottom of a correction is more luck than anything else. I would prefer to state a range. Right now let's say we surprise to the upside next week on some news out of Europe. The S&P experiences a sharp reflex rally to 1,225 or more before swooning once again. We fall back to the lows and maybe even break them.
I would be focusing on purchasing industrials, materials, technology, large cap and dividend stocks. I would also look at Germany as well as developed markets outside of North America such as Europe, Australasia and the Far East as represented by the MSCI EAFA Index.
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.
Independent Investor: Pre-Owned Autos Selling at a Premium
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My wife, Barbara, and I have been shopping for either a used or new car. We own matching 2004 Subarus that we purchased used back in 2005-2006. We would much prefer a vehicle with even better gas mileage, but we live in the Northeast where snow and ice demand a four, or all-wheel, drive vehicle and that limits our choice of fuel-efficient transportation.
The good news for us is that although all used cars are priced higher these days, smaller, fuel-efficient models and hybrids are commanding especially good prices. As a rule of thumb, every $1 increase in the price per gallon of gas, the value of used compact cars rises 8 to 12 percent. So if the trade-in value of your car was worth $10,000 last year, it could bring $11,000 this year.
However, this shortfall in supply won't last long. Dealers estimate by late fall or winter the pipeline will begin to fill once again.
Much of this used-car price windfall is a by-product of the 2008 recession. The consumer was hit by the double blow - less income and, thanks to the financial crisis, increased difficulty in qualifying for either a lease or auto loan. As a result, today, three years later, there are a lot fewer used autos for sale. The average car on the highway today is 10.6 years old, according to Polk, the auto research firm. That's up from 9.8 years in 2007.
Another large source of used cars for dealerships has traditionally been the leased cars market. Companies sell leased cars as used when leases expire. But a lot fewer leases were written during the financial crisis, leaving a large hole in supply at the wholesale level.
"Wholesale prices are quite high," said Mike Coggins, general manager of Haddad Dealerships in Berkshire County. "We haven't passed those prices on to the consumer so our margins are smaller."
Still, Coggins isn't complaining since his used car sales are up 25 percent this year, leading all of his other divisions.
The effect of Japan's earthquake has also contributed to an overall shortage of new autos this year. The disaster in Japan disrupted the world's supply chain of auto parts as well as the export of many Japanese-made vehicles to the United States. This is a far cry from three years ago, when all three U.S. automakers were on the ropes and dealerships around the country were closing every day.
It may actually make more sense for us to look at replacing our autos with a new car this time around. I am going to do my research, something you should do as well, if you are planning to buy a car. Figure out the price differences between a used model and a brand-new vehicle before making a decision. I tend to drive my auto for many years (as opposed to trading it in every three years) so the new-car avenue may make economic sense for me. Find out a ballpark asking price for your vehicles from Kelly Blue Book on the Internet and find out what similar cars are selling for in your area.
I know that we would probably get a higher price for our vehicles by selling them to a private party. Something I suggest you try if you really want to get the best price for your car. We will probably take a 10 percent haircut on the price by trading it in to a dealer.
Yet, neither of us is willing to put the effort into listing it on the Internet and haggling with potential buyers. I would much rather devote that time to writing columns for you, my readers.
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: No Where Land
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"He's a real nowhere man,
Sitting in his Nowhere Land, Making all his nowhere plans for nobody." |
If there was ever an argument for staying on the sidelines, this week's market action should have driven that point home to even the most aggressive investors. We are betwixt and between, groping blindly through a fog of confusion, rumors and false starts. Over the short-term expect more of the same.
Europe continues to be the dog that wags our tail over here in the U.S. A Wall Street Journal headline like "German Vote Bolsters Rescue" sends the markets higher one day only to crash the next when the next headline contradicts yesterday’s news.
"Why can't they make up their mind," grumbles a reader from Great Barrington. "This travesty has been going on for well over a year."
If it were just that simple; unfortunately, the European Union consists of many countries and even more voters who have different ideas about how and what the ultimate solution to Greek or Portugal or even Italy's debt should be. As a result, the process of building a consensus is excruciatingly slow with countless starts and stops.
What the markets need to do is unhook from the day-to-day give and take among the European players. But what we need to do and what we actually do are sadly disconnected, which explains much of the present volatility in the markets. As for me, I am in the camp that Europe will solve their problems, maybe not today or tomorrow, but they will come up with a solution that over time will lead to economic stability.It is clear that Germany has emerged as the strong man of Europe and as such investors should take a close look at the country as a potential area of investment. The country's stocks and exchange traded funds have been sold indiscriminately along with weaker countries such as Ireland, Portugal and Greece providing an opportunity for those who are willing to wait.
As readers may recall, I changed my tune on a possible return to recession after a spate of weak unemployment and GDP data over the last few months. The data has continued to indicate a weakening economy, but up until now, both the government and most economists maintain the U.S. is still growing.
The Economic Cycle Research Institute last week announced that they believe the U.S. economy is indeed tipping into a new recession. Why should you care what one economic forecasting outfit says? Well, their track record has been pretty good, calling the last three recessions accurately without any false alarms in between. According to ECRD, weakness is spreading from one indicator to another and there is not much anyone can do to avoid or turnaround what they believe will become an increasingly vicious cycle.
The oversold market rally I expected last week occurred on schedule. At its height it delivered over a 4 percent gain in just three days before disappearing just as quickly. Since then the daily volatility, if anything, has increased with averages moving up and down a percent or more in mere hours. Trading this market is a recipe for disaster. Even professional traders have backed off after losing substantial sums in intraday trading.
I continue to believe investors should remain in defensive sectors, dividend plays, cash and the bond market.
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: Should You Be Worried About October?
A common perception on Wall Street is that October is the worst month of the year for the market. It is true that the month has historically failed to provide stellar returns, but it is actually September that deserves the title of the worst market month of all.The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.
So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8 percent plunge in the Dow on Oct. 29, 1929. In today's markets, a 12 percent plunge doesn't feel like a big deal but back then it was substantial and it didn't stop there. The market went on to lose 90 percent of its value and usher in the Great Depression.Then there was the stock market crash of Oct. 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world. Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.
And how could we forget October 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500's 80-year history. We registered the most down days in a single month since 1973.
Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.
September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September's stock market underperformance.
Back in the day, much of 19th-century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market. This would also coincidentally push down prices in the stock market that month.
Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9 percent in September. In the first two years of a presidential term, the performance is a bit worse. Overall, investors have suffered the most double-digit losses in that month as well.
In today's world, other concerns might explain September's continued poor performances. There is the "back to work" phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.
One reason for that disappointment may be that a company's earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements oftentime disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company's stock price may decline or simply mark time temporarily. Many investors won't want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.
This year, September has certainly lived up to its reputation with the averages declining almost 5 percent overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit better.
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: Highway to the Danger Zone
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"Highway to the Danger Zone
I'll take you Right into the Danger Zone" — Kenny Loggins from the movie "Top Gun"
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One would think that the world is coming to an end. By Friday morning every headline, every opening sound bite on television and on the radio began with the massive declines experienced by world stock markets this week. Take all this with a grain of salt.
"You never bet on the end of the world," said Art Cashen, the experienced Wall Street veteran and director of floor services for UBS. "That only happens once and the odds of something happening once an eternity are pretty long."
I respect Art and agree with his prognosis. Readers get a grip. This is a correction, a nasty decline for sure, and will, by the end, take away as much as half of the gains you have made since March, 2009. But remember, even if you are still one of those buy and hold, hold-out investors, you are still up 50 percent from the lows."But I'm still underwater from what I had in 2007," laments one reader from Connecticut.
For years I have been imploring readers to find a money manager or broker who does not believe in holding a portfolio through thick and thin. It is a recipe for disaster, in my opinion, that only works during certain specific time periods. The first 20 years of this, the 21st century, is not one of those periods. The problem is that only a small handful of investment advisers (less than 5 percent) within the financial services community actually buy and sell. But since it's your money, I would urge you to do the work and find one.
It may not be the end of the world, but at the same time I am not discounting the risks that face us. We are truly accelerating down the highway into an economic danger zone. The continuing weakness in our own economy, the very real possibility of a European bank failure and Greek default, a hard landing in China, plus another half-dozen potential mind fields does not give one a high degree of comfort. When one acknowledges that we lack the leadership, both here and abroad, to handle this dogfight, even Maverick and Goose might panic.
Instead, it is a time to stay calm and focused. Remember, I was here for you through 2008-2009 and if you followed my advice then you did very well. And I'm here for you now.
No one who reads this column consistently should be surprised with the market's recent declines. In last week's column, John Roque, my friend and one of the best technical analysts on Wall Street, clearly indicated that he thought that a decline to 950 on the S&P 500 Index was a strong possibility. I agree with him wholeheartedly. Yet, even at 950, I don't believe it is the end of the world as we know it.
It also does not mean that stocks must go straight down to that 950 level. I expect there will still be some ferocious rallies to the upside, like we experienced the week before last, where the indexes gained 6-7 percent in three days. I advised investors to sell those rallies. If you haven't already taken my advice and reduced your equity holdings, do so on the next bounce and move into cash or bonds.
Some retired investors need to remain in dividend-paying stocks because they are dependent on the income to make ends meet. If you are in that category, then please consider hedging those holdings with covered put options or inverse exchange traded funds.
On a short-term basis, the markets are oversold. I would not be surprised to see another bounce ahead of us but it does not change the overriding trend, which is down, act accordingly.
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.
