The best rallies are those that move up, take a breather and then move up again. That way markets do not get extended, the gains are fairly predictable, as are the pullbacks. It appears that is the kind of market we are in at present.

The S&P 500 Index reached a low of 1,249 exactly one month ago. It then soared 7.2 percent to 1,339 in the next 23 days. We began this pullback a week ago and so far have given back less than 2 percent of those gains. I would expect a bit more time and possibly downside before resuming our march toward 1,400 on the S&P.

If you are looking for excuses (as so many of us do) to explain the short-term gyrations in the market there are plenty of culprits. If you are a Republican, it's all about the runaway deficit and the opposition's unwillingness/inability to tackle spending and raise taxes. Democrats will argue it's the fault of the GOP and the tea party that narrowly missed shutting down the government by tacking on superfluous riders to the deal. I expect increased rhetoric and market volatility as the debate on the debt ceiling intensifies, so be prepared.

But all of that is simply headline news. The real questions that are making the rounds of trading floors and hedge fund offices are these: At what point does "non-core" inflation, (energy and food, for example) start to impact corporate profits? Are we already seeing some of that risk this quarter as companies voice their concerns about profit margins in the future?

When will the widening gap between America's haves and have-nots reach a boiling point? Over 70 percent of the population is caught in a terrible climate of stagflation while the top 30 percent get richer and richer. Higher commodity prices will eventually force producers to pass on price increases to consumers. Will these consumers demand higher wages in order to stay afloat? Will corporations respond by raising worker's income or will they hold the line? If they hold the line, will that mean consumer spending retreats and the economy slows? Either way, corporate profits will suffer.

Overseas, Spain's real estate losses are massive and at some point will come to the forefront. How will Europe and the world meet that challenge? Spain, unlike Greece, Portugal and Ireland, is a big economy and problems there would have a severe impact on other economies.

Will China be able to continue its role as the world's economic locomotive? The government is struggling to engineer a "soft landing" as it attempts to control/reduce inflation while maintaining a high growth rate. At best, this is a difficult task and if they over tighten, causing their economy to falter, what will that do to global economic growth?

At the center of this debate is QE 2. There is an extremely high correlation between the rise in commodity prices, the stock market and the Federal Reserve's open market purchases of securities. The ripple effect of QE 2 has spread all over the world and the above questions center on what happens with the end of QE2 in June.

The Fed is flooding the economy with money and that money is sitting in bank vaults and on corporate balance sheets. So there is plenty of money to hire workers and raise wages to pay for those higher prices brought on by sky-rocketing commodity prices. Of course, what I am describing is the beginning of an inflationary cycle that, if left unchecked, could lead to hyper-inflation.

Given that no one knows how this story will turn out, one can forgive the two steps forward, one step back volatility in the markets. Gold and silver continue to rocket higher since all we can be sure of right now is that the Fed will continue to pump money into the economy until June. It is also why I believe the stock market, regardless of these short-term pullbacks, is heading higher for now.

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.

On a daily basis, I review portfolios of stocks and mutual funds from clients and readers. What strikes me most about all these portfolios is that I rarely come across one that has done better than the market. A large part of the problem lies in their choice of investments.

When I say "the market," normally I use the S&P 500 Index as a benchmark. Sure, there are other indexes I can use, ranging from the Dow Jones Industrial Average to a basketful of regional and global indexes, but most pros use the S&P 500 as the market proxy. The truth is that it is notoriously difficult to beat the market and do so consistently.

"But what about Apple?" protests one recent client, who has owned this darling of Wall Street for several years. "It has beaten the market hands down every year."

True enough, Apple, along with a number of other individual stocks, have done better than the market for a year or two or even three, but they have not done so consistently year after year. And even though Apple has done better than the market, I have yet to see any equity portfolio with just that one investment. Normally, Apple is just one of many investments in the portfolio. When all these returns are combined, the gains of an Apple are offset by losses in other stocks.

The risk in holding individual stocks is twofold. One, if you hold comparatively few stocks and one or more blows up, your portfolio will suffer dramatically. If, on the other hand, you have a large stock portfolio it becomes difficult to follow and your performance will tend to mimic the market.

Investing in mutual funds is less risky than owning individual stocks because your risk is spread out among many more stocks; but unfortunately, in most cases, performance also declines. Statistically, the pros that manage mutual funds fail to beat the market over 80 percent of the time. If you also add the fees that these mutual funds charge investors each year their performance is even worse.

Now, just like stocks, there are mutual funds that have a fabulous track record, either because the fund manager is especially gifted, lucky or both. Think Peter Lynch, the fabled manager of Fidelity's Magellan Fund, or Bruce Berkowitz, recently named the fund manager of the decade. But finding the next Peter Lynch is as difficult as finding the next stock market double.  In the meantime, the risk of picking wrong can be monumental.

Ken Hebner, a well-known index fund manager, argues that by buying a diversified portfolio of index funds, that incorporate emerging markets, international markets as well as the U.S. market, will provide you the best results with lower risks than a portfolio of stocks. I would take that a step further.

My experience indicates that by including certain sector index funds in your portfolio (while excluding others) you could generate even greater gains than the market. For example, during the first quarter of this year, the materials, energy and small cap sectors lead the market higher. Those investors that were overweighted in these areas beat the market with much less risk than if they had held individual stocks in those sectors. In addition, the expense ratios for index funds are much cheaper than mutual funds. Bottom line, index funds offer far less risk than stocks, outperform mutual funds 80 percent of the time and are cheaper, easier and trade as frequently as stocks. What's not to like?

We all waited with bated breath until the end of last year, only to see Congress extend the Bush tax cuts for another two years. Although the legislation passed, it did create some issues that you should be aware of in filing your taxes this year.

Let's start with property taxes; something most of us have learned to despise. Until last year, if you owned a home you were able to deduct a portion of your state property taxes in the form of an enhancement or an addition to your standard deduction. The deduction was worth between $500 and $1,000 depending on whether you were married or single. This provision was not extended, but you can still claim the deduction providing you itemize your deductions. The problem with this new wrinkle is that many Americans do not have a sufficient amount of deductions to make itemizing worth doing.

Given the vast number of workers who lost their job during this last recession, if you were unemployed in 2009, the government granted an exemption in unemployment income up to $2,400 per person. That meant you only had to pay taxes on earned income above that amount. That exclusion has been eliminated as well.

So if you were unemployed at any time last year and collected unemployment compensation you owe taxes on 100 percent of that income. The problem here is that few of these jobless taxpayers withhold taxes from this income, so now they will need to come up with the cash they owe the IRS.

The first-time home buyer credit and the follow-on home buyer tax credit on primary residences provided a tax credit ($8,000 for first-time buyers and $6,000 for other buyers) but require that you keep your new residence for at least 36 months. That means if you bought and sold that new home you must repay that tax credit to the government this year.

The American Opportunity tax credit was a bit of new legislation that replaced the Hope credit that allows taxpayers earning $80,000 ($160,000) for joint filers) to claim $2,500 tax credit for tuition, fees, books, supplies and equipment required for educational studies paid in 2010. There is some confusion about this tax credit because the government already allows a deduction of up to $4,000 for the same items. You can't claim both the deduction and the credit.

People become confused between a credit and a deduction. Simply put, a deduction reduces your income while a tax credit reduces your tax bill. If you earned $60,000, for example, and took the $4,000 education deduction that would reduce your adjusted gross income to $56,000. If you were in the 20 percent tax bracket, then the tax savings for you would be ($4,000 X 20 percent) or $800. However if you selected the tax credit, your tax bill would be reduced by $2,500, a dollar-for-dollar tax savings.

Because Congress acted so late in the year, the IRS said it would need until mid-February to reprogram its systems. As a result, they advised that those who plan to itemize their deductions wait until after March 1 to file their taxes. Since most of us wait until the very last second (or longer) to file, this delay should not have a major impact on us taxpayers. In any case, the coast is clear for filing your taxes. I bet you just can't wait.

Note: You've got some extra time. Tax day is Tuesday, April 19, this year because the 15th falls on a Friday holiday in Washington and Monday falls on Patriots Day in Massachusetts.

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 markets presented plenty of head fakes this quarter. In January, contrary to everyone's expectations, the gains of last year kept right on coming through most of the first quarter, only to hit a brick wall in March thanks to troubles in the Middle East followed by nature's one-two punch to Japan. Despite that, the indexes finished the first quarter with the best gains in over two decades.

The Dow racked up 742 points (6.4 percent), the S&P 500 Index gained 68 points (5.4 percent) while the NASDAQ closed up 128 points for a 4.8 percent gain. If we annualize those gains we could be looking at a 20 percent plus gain for the year, which puts my forecast of a 20-23 percent gain in 2011 right on target.

"It was a choppy quarter though," commented one client on Friday who lives in Dalton.

I agree. Clearly this market is exacting a price (higher stress and wear and tear on the nerves) for the gains we are making. I suspect that additional volatility is waiting for us as we continue to climb a wall of worry throughout this next quarter. Some of the concerns I believe will haunt us through the spring are the price of oil brought on by geopolitical turmoil, continued problems among European financial institutions and, of course, the end of QE II, which occurs in June.

Can the economy continue to grow without the multibillion dollar monetary stimulus that the Fed has been providing for well over a year? The economy appears to be growing and unemployment declining, but is that a function of real demand or simply a response to the Fed's easy money policies? How will the stock and bond markets react to an end to this stimulus?

Smarter people than I are expecting a rapid and disastrous response by the bond markets to the sunset of QE II. They believe that interest rates will immediately spike, disrupting what little lending is already occurring and thereby throwing the economy back into recession. I find that hard to believe.

I'm going to give our central bankers, led by Ben Bernanke, the benefit of the doubt. They read the same papers we do and are well aware of the fears of the markets. Is it really plausible that the Fed will step out of the game and simply watch from the bleachers if the doomsayers are right?

There is simply too much at stake and Ben Bernanke knows it. I believe the process of pulling out of the market will be a managed one. For those who pay attention to "Fed Speak," I maintain that process is already at work. Recently a number of Board Governors who have granted interviews advised the financial community that the Fed will be taking a more neutral policy position in regards to stimulus in the future.

That's not to say there won't be concerns and with them volatility. Skittish investors will always jump the gun, many times before they actually have the facts. In today's markets, trading on rumors is just as viable as trading on the facts. So prepare for some rough sailing; but I get ahead of myself.

As a portfolio manager, it's part of my job to fret and worry about what will be, instead of enjoying what is. And a rising market is what we can expect over the next few months. Sure, we can and will have down days, but I believe they will be short and shallow. Commodity stocks will lead, so make sure you have some exposure to those sectors, and if you haven't yet, get back into the stock market — now.

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.

Trashed by environmentalist, near and far, it is the bad boy of the energy arena. Environmentally hazardous, its producers and consumers are notoriously lax in even attempting to do something to control the pollution they spill into our atmosphere. You know these boys. Their industry usually hides under the proverbial wood pile minting money, only reluctantly revealing themselves in daylight when called to explain yet another mine disaster or ruined river. So why is the demand for coal and those that produce it gaining popularity on Wall Street?

Coal, for those who don't know, is divided into two categories: metallurgical or coking coal, which is used for steel making and thermal or steam coal, which is used for heating and electrical generation. "Met" coal is a high-priced, low-volume product that boasts a high heating value. Here in the U.S., we only consume about 15 million tons of Met and the rest (30-40 million tons) we export to places like China.

Met coal is used in 70 percent of global steel production and accounts for 10 percent of world coal production. It is steel's primary energy source and takes 1,300 pounds of coal (called coke) to produce one ton of steel. The demand for this kind of coal has been rising steadily for some time as country after country in the emerging markets produce more and more steel for building infrastructure and export.

The recent earthquake and tsunami disaster in Japan has opened up an enormous new market for steel and the coal to produce it. Japan has already embarked on the expensive and necessary task of rebuilding. Investors figure Japan is going to need a lot of steel (and therefore coking coal) to accomplish that. Together with the already robust demand from emerging markets, the stocks of these coal producers are in demand.

But that is only one side of the coal market. Thermal or steam coal production dwarfs that of its pricier cousin. Thermal's primary use is in power generation. Worldwide, over 7 billion tons of this stuff is consumed each year. The U.S. uses about a billion tons a year, but because it's heavy and expensive to ship, not much (about 22 million tons) of it is exported.

The fact that over 40 percent of the world's electricity is derived from coal-fired power plants explains why in an era of solar, wind, natural gas and other green alternative energy sources, old King Coal keeps rolling along. It took many years and trillions of dollars to build this coal-based system of power generation. It will take a lot more time, effort and money to convert that system to alternative fuels.

Here in the U.S., 48 percent of our electricity comes from steam coal. Once again, thanks to the ongoing crisis in containing and preventing a radioactive melt down in Japan's Fukushima plant that percentage of use could increase if nuclear power generation is derailed in this country. Worldwide, politicians and voters appear to want at least a moratorium on building new nuclear plants until further studies are done analyzing their safety and other factors. Since we all know how long studies take, this delay can take time and any energy gaps will be filled by additional coal consumption. Investors are quick to realize that this presents further opportunities for additional coal consumption.

Coupled with these developments is China's new status as a net importer of coal beginning in 2009. Most of the 126 metric tons of new imports have come from Australia, but there is some discussion on whether the U.S., which some call the "Saudi Arabia of coal" with 238 billion tons of proven reserves, could figure out a way of exporting our coal cheaply to Asia. That would translate into a big jump in the price of coal stocks.

Does all this new coal demand mean that we will have to settle for coal and its residual pollution as a major source of energy in this country forever?

Not necessarily. It is true, according to the Environmental Protection Agency, that 44 percent of the coal-fired plants in this country currently have no pollution control equipment. There are 400 coal-fired plants spread across 46 states. Their emissions result in about 380,000 tons of black garbage that is spewed into our air each year. Mercury emissions alone around these plants are killing 17,000 people each year and causing 11,000 hear attacks, not to mention the impact on children, whose health is affected most by these poisons.

Even the billions in bribes the industry has paid to Washington for decades to overlook these "minor nuisances" no longer work. Americans have demanded and government has finally agreed to take action. As a result, the industry has been warned that they either retrofit existing facilities with counter measures or close them entirely over the next few years. The EPA's new emission restrictions require a removal of 90 percent of mercury emissions by 2015, along with 80 percent of sulfurous oxides and 52 percent of nitrous oxides by 2018. These new standards will apply to 31 states and the District of Columbia.

It will mean an enormous expense and effort on the part of power generators. Of course, much of the expense will be passed on to consumers in the form of higher monthly energy bills, but even then I suspect that some plants just won't be able to continue to functions. As a result, I expect to see cheaper (and cleaner) natural gas replace coal in the generation of electricity over the next few years. That's good news for all of us and for natural gas producers. Did I mention that I like that sector as well? I guess that will have to wait for a future column.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.