@theMarket: Say It Isn't So

So far June is playing out as expected. Stocks are see-sawing in a trading range that is driving day traders crazy. Hopefully, you are not one of them.

This week was almost a carbon copy of last week. For two weeks in a row the averages tested the 1,600 level on the S&P 500 Index and then bounced higher. That was also the level where technicians predicted the market would find support (at what is called the 50-day moving average).

Don't worry; I'm not going to get all technical on you. It is sufficient to note that buyers stepped in at the same level that they did last week. And that is understandable since there really is no reason to go much lower than that. I have been looking for a mild pullback in the 5-7 percent range and that is exactly what we are getting.

If you have been reading my columns, you know that the Fed has provided the excuse the markets needed for this decline. As such, all eyes will be focused this coming week on the central bank's FOMC meeting. Investors are hoping for some clue or hint among the meeting minutes to gauge whether the Fed's intention to taper their stimulus program has firmed or weakened.

Tell me you're not leaving Say you changed your mind now That I am only dreaming That this is not goodbye This is starting over If you wanna know I don't wanna let go So say it isn't so." — Gareth Gates

I believe the markets are misinterpreting the Fed's actions. Nonetheless, the fear that the Fed plans to decrease the level of stimulus, if only modestly, is having a damaging effect on interest rates. In addition, investors are now wondering if the Fed's commitment to keep interest rates low, at least until the unemployment rate declines to 6.5 percent, is in jeopardy as well.

All sorts of interest and dividend yielding securities from U.S. Treasury bonds to preferred stocks have seen a downdraft in prices as a result. In the housing market, mortgage refinancing has dried up as 30-year mortgage rates hit 4 percent.

This is not what the Fed expected, in my opinion. They have acknowledged that in the past their on-again, off-again quantitative easing programs caused an uneven recovery in the economy and volatility in the markets. For the Fed, the trick is to wean the markets off central bank stimulus without causing the same results. That is easier said than done.

To be fair, the Fed has already accomplished some truly stupendous results over the last few years. They have kept us out of another Depression and initiated an economic recovery, even if it is slower than we would have liked. Their stimulus efforts in the financial markets have succeeded in recouping all of our stock market losses and then some. The housing market, which triggered the financial crisis, is a much bigger problem. But even there we are seeing a rebound as a result of their efforts

What would help would be stronger economic growth. A few back-to-back quarters of plus 3 percent growth would re-focus investors away from Fed stimulus and back where it belongs on the free market economy. Unfortunately, this grand central bank experiment is like any experiment. There is a lot of guess work involved. If, for example, the Fed were to wait until after one or two strong quarters of growth to taper, there is a risk that inflation could spike. That would force the Fed to ratchet up interest rates and torpedo the economy altogether. If they act now, they risk slower growth or even a recession.

As for financial markets, it is understandable that the Fed wants to inject some uncertainty back into the markets. Uncertainty is a key ingredient in investing. If investors believe the Fed will always have their back in the form of more and more stimulus, then investing becomes a one way street. It can create a bubble in stock prices just as easily as it created a bubble in the housing markets over the last decade.

So as much as we would all like to hear the Fed say it isn't so, we need to be aware that at some point in the future they are going to take away the punch bowl.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Rising Interest Rates Spook Markets

Over the last month, the interest rate on a 10-year, U.S. Treasury note has risen half a point. That may not sound like much in a market that has seen nothing but declines in Treasury yields for years, but investors fear it is simply the start of something big.

By now readers should know that we are in the ninth inning of a thirty year bull market in U.S. Treasury bonds. Everyone (including me) has been warning investors to liquidate their Treasury bond holdings. It is a case of when rates will rise (not if). No one knows exactly when that will happen, but why wait around until they do?

But many bond investors have stubbornly refused to listen. They are driven by fear. They are convinced that stock markets will retest their lows of 2009 on the back of another deep recession or worse. Clearly that has not happened yet (but “yet” for some is still the keyword).

However, as the economy continues to climb, unemployment falls and the Fed stimulates, more and more investors are re-thinking their safe-haven investments. It is the reason gold sold off so dramatically this year and, in my opinion, the same thing is beginning to happen in the Treasury market.

May's spike in interest rates, however, has more to do with misplaced investor concerns that the Fed will begin to taper off its monthly bond purchases as early as June. They fear that with less Fed buying, bond prices will decline and interest rates will rise. This month that has become a self-fulfilling prophecy. I think any talk of tapering off is premature at best and at worse, simply an excuse to take profits in both the stock and bond markets.

I do believe, however, that at some point the Fed will gradually reduce its buy program based on two factors: a stronger economy and a lower unemployment rate. Neither factor is anywhere near a level that would prompt the Fed to withdraw its stimulus even slightly. And when they do, it will be a good thing and no reason at all to sell stocks or even certain kinds of bonds.

Corporate bonds, for example, both investment grade and high yield, do quite well in an atmosphere of rising U.S. Treasury interest rates caused by stronger economic growth.  In that environment, rising rates simply signal a more benign environment for corporations, which have less risk of bankruptcy and are better able to make their debt payments. For corporates, it is virtually the "sweet spot" for investment gains.

Many investors fail to understand that. They have been selling perfectly good, high yielding corporate bonds needlessly. So, by all means, cash in your Treasuries but keep your corporate bond investments. Sure, at some point, when interest rates rise enough, all bonds will be impacted but that time is still a year or two away.

As for the stock markets, this week was uneventful. We are entering the summer period where not much can be expected to happen. It is a period where Wall Street moves to The Hamptons or up North to the Berkshires. Hopefully, the markets will take the summer off as well. We are in need of a pause, one that will ultimately refresh this aging bull.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: 1995 Redux?

By my reckoning, this leg of the stock market rally began about a week after the presidential elections. The rally overall has been going on much longer. The question everyone is asking is how long it can go on without a major correction.

If one looks back through history, the chances of the S&P 500 Index continuing to move higher without at least a 4 percent pullback is slim at best. There has been only one year in recent history, 1995, where the market continued higher throughout the year without any kind of significant pullback.

I remember that year well, and there are both similarities and difference between 1995 and today. Back then, U.S. unemployment was below 6 percent. Today it is 7.5 percent. The economy was recovering from a mild recession at that time but it was a bumpy ride. GDP fell below 1 percent for the first two quarters of the year and some worried the economy would slip back into recession.

Corporate profits were rising, whereas today, those profits are already at record highs. China's economy, like today, was slowing. Commodity prices were dropping, Europe's economy was moribund at best and this country's deficit was at a record high (as a percentage of GDP).

Investors had little confidence in their elected officials. Congress was fighting over reducing the budget and other social issues. It was so bad that congressional Republicans actually shut down the government later in the year. It would be fair to say that the stock market was climbing a wall of worry throughout 1995.

Alan Greenspan, who was running the Federal Reserve Bank at the time, had already engineered a bond market crash by raising interest rates in 1994 in order to head off an expected rebound in inflation. In the spring of 1995, he reversed those policies and began to ease at the same time that the economy was beginning to grow again.

As I have said in the past, history tends to rhyme, if not repeat itself, and the similarities between Fed policies today and those of Alan Greenspan are striking. Like 1995, the U.S. economy is also growing, registering a 2.5 percent annualized gain in the first quarter while our Fed continues to ease.

The first half of the Nineties had been turbulent and investors were shell-shocked, distrustful of Washington, the Fed, and definitely the credit and equity markets. No one, including yours truly, was prepared for good news and when it came we were skeptical at best. Does any of this sound familiar?

Granted, 1995 was an outlier of a year and nothing says 2013 will be a repeat of that year. But I have often said that the markets will do what is most inconvenient for the most number of investors. Everyone has been warning you that the markets are due for a correction. Heck, I have been saying that off and on since January. The point is that it doesn't have to happen in May ("sell in May and go away") or June, July, August, etc. So go ahead and dream about a market that just continues to go up. It probably won't happen, but what if it did?

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: The Goldilocks Market

The S&P 500 Index made record highs this week. It is catching up with the Dow, which has been making new highs now for over a month. Yet many investors do not believe this rally. Some are still sitting on the sidelines waiting and praying for a pullback that has not occurred.

There is an old saying that the market will do what is most inconvenient for the greatest number of people. Right now this slow grind higher seems to be causing more irritation and angst than anyone could imagine among many investors. Those who are in and experiencing double-digit gains so far this year still worry about how high the markets have come and whether or not they should bail.

"I don't get it," complained one such client, "The data is checkered at best. The unemployment rate is too high, but the market seems to ignore all of it and just keeps climbing."

"It is a Goldilocks market," I explained. "As long as the economic data is neither too hot nor too cold, the markets will continue to rise."

It really doesn't matter that much whether earnings are good or bad or that the economic date is contradictory. It is all about the Fed and it's on-going stimulus. Weak numbers mean that the Fed will continue easing. This week's Fed announcements, following their two day policy meeting, only encouraged investors further.

Investors chose to read positive implications into the Fed's statement that they might "increase or reduce" the size of its monthly $85 billion purchase of bonds. It will depend on the rate of unemployment and inflation. Since inflation has dropped below the Fed's target of 2 percent annually, there is clearly a green light to increase bond buying if they want.

As for unemployment, not only is the rate way above its target (6 percent versus today's 7.5 percent rate), but the numbers are up one week and down the next. So given the state of both inflation and unemployment, the markets are betting that the Fed is at least going to maintain their buying. And if the numbers come in weaker than expected, there is a good chance they will increase their purchases. Thus, bad news is good news.

The good news, like Friday's unemployment numbers of 165,000 new jobs (140,000 were expected) or the greater than expected rebound in national housing prices, was tempered by negative news on other fronts. March factory orders declined by 4 percent (3 percent expected) and non-manufacturing ISM data, which measures the nation's services industry, was also a disappointment. That data presents a mixed picture at best. Taken together, the numbers hold out the hope for even more easing while at the same time remove the possibility of an end to further stimulus anytime in the near future.

Like I said, the national porridge is neither too hot nor too cold. It is just the way investors and the market like it. So where are the three bears in this story?

One bear could be that the economic data becomes so bad that investors fear even the Fed can't prevent a recession. The Fed (and I) has made it clear that "fiscal policy is restraining economic growth." That's Fed speak for the wrong-headed, ill-advised policies that our Congress insists on enacting, such as the sequester cuts. There is a possibility that our elected officials could engineer our next recession.

Another bear could appear if the economic data indicated much higher growth ahead then the Fed expects. That would force the central bank to reduce its bond buying. That seems a remote possibility given Congress' penchant for doing nothing, unless it involves increased fiscal austerity.

The third bear could be a "Black Swan" type of event. North Korea, Iran, Syria or some other geopolitical event could also cause markets to swoon. We saw how fast the stock market declined in the aftermath of the Boston Marathon massacre. Something like that could trigger a rush for the doors. That third bear is always present and one reason I advise all but the most aggressive clients to keep some of their portfolio in defensive securities.

So Goldilocks is alive and well today but unlike the fair maiden, it is always smart to remain somewhat cautious when investing in markets. After all, you never know who may be lurking under those covers in your bed.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

@theMarket: Five for Five

It was another good week for the averages with all three indexes chalking up five days of gains in a row. Friday, however, was a mild disappointment thanks to the latest GDP data.

Economists were looking for a first quarter gain of 3 percent in GDP. Instead, the nation's gross domestic product came in at 2.5 percent, but it was still a good number compared to last quarter's 0.4 percent growth. The stock markets, however, have proven that they care less about growth and more about how much and how long the Fed's monetary easing will continue.

In this goldilocks market, good economic data is good news for stocks but also are disappointing economic numbers. I know that sounds crazy, but there is certain logic to this madness.

The Federal Reserve has promised to continue stimulating the economy until the unemployment rate drops by another percentage point or two. In order to achieve that target, the economy must continue to grow and grow at an increasing rate. So, according to the typical investor's logic, disappointing data simply means that the Fed will need to keep pumping money into the economy, which is good for stocks. Of course, if the numbers turn really sour and GDP drops precipitously then all bets are off. But 2.5 percent growth is not too hot or too cold and just enough to insure that the money keeps flowing into the stock markets.

All week Europe has rallied as well. There is a building consensus over there that economies both big and small need further stimulus and possibly an interest rate cut by the European Central Bank. "Austerity," both here and abroad, appears to be becoming a bad word for all but a few die-hard right-wing economists and their followers who we will call "Austerians."

Clearly austerity has not worked in Europe, has not worked in this country, and has not worked in Japan. As a result, what we are seeing is across-the-board movement toward further easing. I, among others, have been arguing for this since 2009.

Of course, those opposed have insisted that unless governments reduced their deficits and restored confidence, simply spending more would only increase debt loads (which are already at record highs). And once countries crossed a theoretical debt-to-GDP threshold, (thought to be 90 percent) they would experience a permanent slowdown in growth as well as hyperinflation.

This argument has raged on for five years with the austerity gang here in America gaining the upper hand this year. Thanks to the Sequester, we are now experiencing the impact of across-the-board cuts at a time when our economy needs spending, not cuts. Oh, and by the way, that theoretical line in the sand that the Austerians insist would sink the economy (based on an academic paper on the subject), was found to contain a mathematical error. Once the error was corrected, the 90 percent debt-to-GDP statistic went up in smoke.

Now, simply because the facts do not square with the Austerians' argument does not mean that they will cease and desist. There is too much at stake to quit now. After all, an entire wing of the Republican Party has been born again (and elected) under this theme. They will stubbornly insist on being right in the face of economic reality until we stop listening to them. In the meantime, despite our debt load and free-spending ways the stock market continues to go higher and higher. Imagine that.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.