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@theMarket: The Fed Keeps Us Guessing
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The stock market, which has been climbing all summer in anticipation of another bout of easing, took the news in stride. The averages gyrated up and down but never really went negative despite what some perceived as disappointment. News out of Europe helped sustain the bulls and the averages. Expectations that the European Central Bank "might" further ease monetary conditions next week kept the markets buoyant. And if not Europe next week, the Fed could always ease at their next meeting in mid-September.
Grasping at straws might be a good way of parsing the rumors that surfaced on Friday that the president of Germany's Bundesbank has threatened to resign. Bulls were guessing that the only reason he would quit is if the European Central Bank was ready to provide more stimulus against the wishes of Germany. It was rather silly that anyone would believe this story, but consider the timing.
The rumor surfaced just hours before the Fed disappointed the markets. It also occurred on one of the slowest trading days of the year when volume was miniscule and participants were leaving early for the three-day Labor Day weekend. It sure smells like an attempt at market manipulation and it worked!
I have to hand it to the central bankers. Both Ben Bernanke and his counterpart in Europe, Mario Draghi, have learned the lingo that keeps the markets high and happy. Words like "fairly soon" or, in Draghi's case, "exceptional measures," when talking about future stimulus has worked like a charm. In these markets where nothing matters but the next fix from the central bankers, government officials are becoming adroit in parceling out just enough hope to keep the stock markets calm and trending upward.
The stock market has also been developing a more positive attitude thanks to the Republican convention this week. The most recent polls show Mitt Romney in a dead heat with Barack Obama. Traditionally, stock markets are thought to do better under a Republican administration since their policies are normally more pro-business and pro-stock markets.
Personally, I would like to see the S&P 500 Index break out of its present range, which has bounced between 1,400 and 1,426 throughout the month of August. It has been encouraging that the bottom level of support has held but so has the resistance at the top. This sideways consolidation is constructive since it has allowed the markets to work off any overbought conditions.
Clearly, no one has made much money in August. We are now entering September, considered the worst trading month of the year in terms of market gains. Some strategists are expecting as much as a 10 percent pullback. As I've written in the past, stocks could easily pull back 3-5 percent at any time, but that's about it. With both the U.S. and Europe's central banks promising to bail out two/thirds of the world's economies, any dip should be contained and simply provide an opportunity to buy equities at cheaper prices.
A note to my readers in the Berkshires:
I have volunteered to teach a course this fall at Berkshire Community College at the Osher Lifelong Learning Institute (OLLI). The classes will be on Mondays from 2:45-4:15 p.m. throughout September and October. The course, "America's Future: Buy, Sell or Hold?" will teach students to think critically about such events as this year's presidential elections, wealth and women, our education system and much more. For more information or to sign up for the course call the OLLI office at 413-236-2190.
Bill Schmick is registered as an investment advisor 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: Watching Thin Paint Dry
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Of course, volume shrinks during the summer months anyway. Wall Street participants take three-day weekends or vacations while finding excuses to be on the golf courses whenever possible. For many, it is a genteel, less hectic time when junior traders man the turrets and talk to their friends via cell phone.
However, Securities Technology, an organization that monitors changes in stock and derivative volume, reports that the daily volume of trading stocks is down 16.9 percent from a year ago. In June alone volume declined 9.9 percent. In Europe it was even worse with a 12.3 percent plunge last month. In addition, trading in derivative markets fell off a cliff, falling 15.8 percent from June to July worldwide. There was also an almost 30 percent drop in exchange-traded funds transactions versus 2011 as well, and this is supposed to be a growth area.
This trend is all the more disturbing since last year's volume declines were just as bad. It appears that investors are abandoning the nation's stock markets wholesale with a growing number of private and even professional investors jumping ship.
Some of the blame can be pinned on the continued presence of high frequency traders who brought us 2010's "flash crash." Last week, one of their fraternity brothers created another mini-crash of over 100 stocks that listed for well over half an hour. They claimed it was a computer glitch that cost that firm over $400 million in losses as well as its independence.
This fiasco follows closely on the heels of the multibillion-dollar derivative loss racked up by one of our nation's "most reputable" banks. It was caught speculating the wrong way in the same markets that brought us the financial crisis. In the eyes of most investors, these incidents simply strengthen the notion that the markets are nothing more than a global casino where the bets are rigged in favor of the dealers and croupiers.
Investors are absolutely correct in my opinion. The game is rigged; the banksters and fat cats get richer while the rest of us get poorer. And if this were not enough, this same one percent of the population is now busily using their ill-gotten gains to buy this year's presidential election. What the diminishing volume shows me is that there is an ongoing "buyer's strike" among investors big and small that will continue until it doesn't.
Is it any wonder that the financial sector continues to lay off thousands and thousands of well-paid Wall Street types? Their business is shrinking away to nothing. Before long all that will be left are the billionaires and their firms. Poetic justice would be a scenario in which they are left trading against each other with the same insider information bought and paid for from the congressmen and senators in their back pockets.
But enough criticism, let's focus instead on buying the dips. There is a dearth of news coming out of Europe and America between now and the end of the month. That gives traders plenty of opportunity to move markets whenever and however they want. For you, that may mean another chance at picking up some equities at cheaper prices, so stay vigilant.
Bill Schmick is registered as an investment advisor 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: Get Ready for More Stimulus
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Actually, this week's sell-off was simply another buying opportunity for those, like me, who are convinced that additional easing is in the cards. How can I be so sure?
The U.S. Federal Reserve in the minutes of its FOMC meeting this week, acknowledged that the economy and unemployment was a disappointment. They said it "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions."
So it doesn't take rocket science to figure out that most of the recent economic data is quickly moving from bad to worse, but the real kicker is the unemployment rate. Despite Friday's welcome gain of 163,000 jobs, the overall rate ticked up to 8.3 percent. That was not an anomaly. The number of new jobs created over the last few months has been falling and this week's number does not appreciatively change that. That, my dear reader, should really concern the Fed. To me, I'm betting the Federal Reserve Bank is going to act. Evidently the markets agree since stocks soared after the unemployment data was released.
Next, we move to European Central Bank President Mario Draghi. After last week's comments that he would "do whatever it takes" to defend the Euro, investors immediately expected him to launch some new bond–buying program this week. When that failed to happen, markets sold off.
I have often reminded readers that prior to accomplishing anything significant in European financial policy; a consensus needs to be built among at least the largest players in the European Union. That does not occur in a week. Draghi is looking for ways to reduce Spanish and Italian sovereign bond rates that will also enlist the cooperation of Germany, France and other nations. He will accomplish that because in the end all the key players have shown that they, too, will defend the Euro with whatever it takes.
In the meantime, ignore all the wringing of hands and gnashing of teeth by the markets and their commentators. Increasingly, world markets act like children: they want instant gratification and as little pain as possible. If they don't get it, they throw a tantrum.
The Fed has a number of opportunities to announce further monetary initiatives. Although they could technically take action at any time, they normally wait for a forum of sorts to make this type of announcement. The closest is their annual meeting in Jackson Hole, Wyo., at the end of the month. But the Fed might want to wait until they see more economic data, in which case it could be September before they move. They could also synchronize their actions with other central banks. That happened in October, 2008 and again in November, 2011.
The point is that further stimulus is coming both in Europe and in the U.S. If the past is any guide to how the stock market will react, it behooves readers to be invested and stay invested until those events occur. QE II was announced in Jackson Hole on Aug. 27, 2010. The S&P 500 Index rallied 20.9 percent. The next stimulus program, "Operation Twist," was launched on Sept. 21, 2011, resulting in a gain of 21.7 percent in the S&P.
It is also noteworthy that in both cases the stock market averages experienced a "V" shaped recovery in the immediate days and weeks after the announcements. Those who were not invested already were forced to chase the markets. Experienced money managers who waited for a pullback before investing were disappointed time after time. Is it any wonder that this time investors who believe more stimuli are forthcoming are buying on any dips?
There are those who argue that because the markets are climbing ahead of the event, much of the gains will already be discounted once the stimulus occurs. "Not so," say I, as I look back to May 18, 2012, (which was the S&P low for this year). To date, the markets have gained about 7.5 percent. Let's say the markets climb another 3 percent before the end of August. If the expected gains are similar to the rallies of the last two QE's (20 percent), that would still leave another 10 percent between the end of August and the November elections. That's more than enough for me. How about you?
Bill Schmick is registered as an investment advisor 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: July Begins With a Bang
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But no market goes straight up, so I think investors should expect a "two steps forward, one step back" kind of market. I would use any pullbacks to add to positions.
In my last column "Germany Blinks," I explained some of the reasons I expected the rally to continue. Here it is just a few days later and some of the stimulus I expected from governments around the world is already occurring. On Thursday, three major central banks announced easing measures. The Bank of England announced another 50 billion pounds of quantitative easing to spur growth in Great Britain. The European Central Bank cut interest rates for the same reason and the People's Bank of China also did an aggressive easing.
In one week we have seen three of the largest central banks in the world pump billions into their faltering economies. Now all eyes will be on our Federal Reserve. Investors are expecting that sometime soon the Fed will join the aggressive easing party.
"I don't get it," said a client from Great Barrington on Thursday, "after all these bad economic numbers, this week's unemployment data was a big positive surprise and yet the markets sold off."
Yesterday, I addressed this issue in my column "Bad news Is Good News." In a nutshell, the worst the economic data becomes in the United States, the greater the chance that the Federal Reserve would be forced to come in and rescue our economy from recession once again. In the past, that has caused substantial gains in the stock market.
Conversely, the better the data the less likely it is that our central bank will need to intervene. So it was interesting to see the market's reactions on Thursday to the positive data on jobs and hiring. The number of Americans filing new claims for jobless benefits fell by the largest amount in two months while employers in the private sector added 176,000 new workers, according to the ADP National Employment report. Yet, the markets sold off.
Since keeping unemployment low is one of the two main briefs of the Federal Reserve Bank (the other is controlling inflation) the good jobless numbers were an excuse to take profits in a market that has seen some good gains since my buy recommendation.
From a technical point of view, the S&P 500 Index broke out of that 1,353-1,357 range and if it should fall back to that level or even below it, I would not worry too much. I warned readers last week that in the short term the markets will remain quite volatile and be prepared for some ups and downs.
I recommend that you ignore those bumps in the road and keep your eye on the fall. I am not sure who will win in the November elections, but I do expect that markets will rally this summer.
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: Germany Blinks
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Italy and Spain decided to play hardball at the European Summit on Thursday. They threatened to block every initiative the EU officials tabled unless Germany and other Eurozone countries agreed to their demands for immediate help — without additional austerity measures. In response, the EU agreed to another $100 billion euro bailout for Spanish banks and a pledge to begin purchases of Italian sovereign bonds using more EU bailout money.
Investors bid markets higher in both Europe and the U.S. on the news. The question is whether the markets will continue higher from here or fall back to re-test the June lows. I believe markets will continue to trade up and down quite sharply in the short term but in the medium term the trend is up.
Let's take the bear case first. The risk to the downside from here, in my opinion, is quite high if your time horizon is over the next few days or weeks. A re-test of the S&P 500 Index's 200 day moving average (DMA) is still a strong possibility. The 200 DMA sits at about 1,295 while the market today is 60 points higher, equating to roughly 4.5 percent of downside risk.
On the plus side, over the medium-term, say between now and November, the markets could rally another 5-10 % or so. I think the risk/reward ratio is definitely on the bull’s side over the next six months.
Technically, the S&P 500 Index is now at a critical level. The average is bumping up against the next serious level of resistance right here at 1,353-1,357. Although the spike up in the markets felt good, much of the gains came from traders who were short the market that covered (bought back) stocks before the end of the quarter.
"Why are you so bullish between now and the fall?" demanded one reader.
The answer lies in events that have transpired over the last few weeks. It began with the Greek elections. The pro-euro party received the majority of votes, which lessened the risk of continental contagion. Over the past few weeks, European governments, led by the new leadership in France, have begun to realize that their strict adherence to fiscal austerity was a mistake. I have argued that fiscal austerity would simply exasperate the length and depth of recession among EU members. That view seems to have gained ascendency among EU members.
I was also looking for a commitment from either the EU or the European Central Bank to support bank recapitalization efforts in Southern Europe. That condition was also fulfilled this week, although Thursday's actions do not solve the EU crisis. It has simply relieved some of the immediate risk to the continent.
Finally, the risk of an economic hard landing in China has been reduced. Earlier this month the Chinese authorities cut domestic interest rates and signaled that they are now willing to reduce rates further if necessary in order to spur their economy. Over the next few months, these developments should bolster the markets but in the short-term there are still many unanswered questions that could keep investors on edge and result in volatile market moves in both directions.
The best way to navigate these markets is to buy on dips, if you have the cash. If you are already fully invested, turn off the television, ignore the news and enjoy your summer. By the time September rolls around you should be seeing some additional gains in your portfolio.
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.
