The Independent Investor: Should You Be Worried About October?

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.

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: Sitting This One Out

Trading in the stock market right now is akin to having your pocket picked by a blind man whose pocket you just picked a moment ago. In other words, get to the sidelines if you aren't already there.

Gapping up and then down to the tune of 1 or 2 percent a day is not my idea of an investable market. And just about every day this week we have witnessed this sort of schizophrenic behavior. Those, for example, who may have been feeling pretty good about catching the market just right last week, have watched all their gains disappear.

This week the game was to sell the market down early Sunday night into Monday morning, then buy the lows, rally back up until Fed Chairman Ben Bernanke spoke on the economy on Wednesday, take profits after that, then rally back, in anticipation of President Obama's speech on Thursday night. But since no one really thinks the president will have much of a chance getting another stimulus plan through Congress, traders went short the market before the speech. Friday, of course, was a big down day.

Don't think you can outwit the pros in this game because most of the action is occurring prior to the U.S. market opening. By the time you get to put an order in to buy a stock or ETF, you are already chasing the price. And who do you think is selling this security to you? You guessed it, the prop trading desk that purchased it early in the morning in Europe or Asia. As the markets become even more volatile, traders are increasingly focusing on buying before the U.S. open, selling in the opening hour of U.S. trade, buying back when Europe closes at midday, and selling or buying again around 2:30-3 p.m. 

I've watched in amusement as the talking heads on television change their minds about the market on a daily basis, based on whatever the averages are doing on a given day. First they are bullish, then bearish. They like the financials and then they don't. Wouldn't it be nice if they just back off and admit they haven't a clue about what is going on? At least that would be truthful and honest.

In markets like this, where the fundamentals are practically impossible to discern, most traders rely on technical analysis. Buy at support, sell at resistance — seems easy — but in today's markets that concept has taken on an entirely new meaning. It is possible, thanks to computers, algorithms and software programs to identify technical levels to buy and sell on a daily, hourly or even minute-by-minute basis.

Make no mistake; you can make a lot of money doing that if you are on the right side of the market. The problem is most individual investors are completely outgunned, with none of the technology the big guys have to guide them in this exercise. You can lose a lot of money in a market like this. That is why I have advised all my readers to move to the sidelines and wait this out.

"But how long will this go on?" exclaimed one frustrated client.

The glib answer is as long as it takes. September and October are normally the worst months of the year for stocks, and so far that has turned out to be true. Europe and its problems are still very much in the forefront of investors' attention. Sadly, the news from across the pond continues to be discouraging. There are even public comments from some of the EU countries that Greece should be forced to exit the Euro. That is something that only two months ago no European leader would dare to say.

Over here, things are not much better. If we aren't already in a recession, we are within a hair's breadth of a long-feared double dip. Much will depend on what comes out of Washington and so far the news is not encouraging. Obama's $447 billion stimulus plan announced Thursday night was simply more of the same policies that have already proven to have no lasting impact on economic growth or unemployment.

Whether or not the GOP will go along with part of this plan remains to be seen. But the market has already given its verdict — it's not nearly enough — which leaves the Federal Reserve and its upcoming meeting on Sept. 20 to save the day. I'm stunned at how much weight the market is giving to this meeting.

Are we setting ourselves up for an even bigger fall? Will there be a QE III and if so will it actually do any good? I wish I knew, but at least I'm honest enough to admit that I don't know. And when I don't know I move to the sidelines, comprende?

Who said finance is boring?

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: Fed Passes the Ball to Congress

By now everyone knows the outcome of Ben Bernanke's speech at Jackson Hole on Friday. For those looking for a cure-all from the chairman of the Federal Reserve, his speech was a disappointment.

Overall, the markets were not nearly as disappointed as one might imagine. I suspect the smart money (see Thursday's column "Can the Fed Save the Markets") was not expecting much in the way of new programs. Of course, Chairman Bernanke promised to take another look at the economy on Sept. 20, when next the FOMC meets, but don't hold your breath.

Although the Fed still has some tools it could use if necessary, the Fed is not omnipotent when it comes to stimulating the economy. There is, of course, quite a bit that Congress, the Senate and the White House could do and the chairman made it clear that the ball was now in their court. He also warned those who are hell bent on cutting spending in congress to be careful what they vote for. He warned that the economy is as fragile as an egg shell right now.

To underscore that point, the second-quarter GDP was revised down again on Friday to only 1 percent from 1.3 percent just a few weeks ago. At that rate, we are teetering between a recession or sub-par growth. I still give a double-dip recession less than a 50 percent chance, in my opinion, but more ineptitude in Washington or a new, negative shock from Europe could tip us over the edge.

The stock market is at an extremely precarious level right now. The averages could go either way, but I believe there is still more downside risk than upside potential over the next few weeks. As a result I remain defensive and nothing that I have seen this week has changed my mind.

Some investors were encouraged when Warren Buffet announced he was taking a multibillion dollar stake in Bank of America. Yet investors should remember that Buffett is a long term investor and is not fazed if the prices of stocks he invests in subsequently go lower, in some cases, much lower, before finally rebounding. And in some cases, his investments do not pan out at all.

I would continue to use any rallies to reduce your most aggressive equity holdings and instead focus on dividend and income investments. Now, even the Fed is looking to our dysfunctional government leaders for new initiatives to reduce unemployment and increase economic growth and that does not give me a warm, fuzzy feeling.

The stock market is in the middle of a bounce right now and I expect that both volatility from Europe and additional selling pressure from concerned investors will drive the averages back to their recent lows. There is a high probability that those lows will fail to hold.

As for this weekend's arrival of Hurricane Irene on the East Coast, experts are predicting that it could cost billions in damages not to mention loss of life. Hurricane Katrina was considered one of the costliest natural disasters to hit America in years. It caused $125 billion in damages and lopped 0.05 percent off the nation's GDP. Let's hope and pray that Irene does not prove to be that bad. The last thing we need is another economic catastrophe. But as the saying goes, when it rains, it pours.

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: Can the Fed Avert Another Selloff?

The safe bet would be to write about something else because by the time you read this Federal Reserve Bank Chairman Ben Bernanke will have already given his speech in Jackson Hole, Wyo., scheduled for Friday morning. I'm betting that whatever he says won't be enough to save the stock market from further decline.

The stock market has been climbing over the last week in anticipation that the Federal Reserve will, like last year, announce another monetary stimulus program similar to QE II. There are several problems in betting on that outcome in my opinion.

No. 1 is investor's knee-jerk expectation that the government will save the stock market every time we have a selloff of 10 percent or better. We have become conditioned to expect some sort of governmental intervention ever since the 2008-2009 financial crises. That's when the TARP Plan was passed, followed by the stimulus plan, the extension of the Bush tax cuts and the cut in payroll taxes, not to mention last year's QE II announcement almost exactly a year ago today.

The second problem is that the Fed has already done quite a bit to stimulate the economy with mixed results. Their announcement of just a few weeks ago that they will keep interest rates low until mid-2013 is actually an extension of QE II, (call it QE 2 1/2). I doubt that they will be willing to move much beyond their present efforts until the economic data clearly indicates further weakening.

There has been some talk that the Fed might change its focus from buying short-term U.S. Treasury bonds to buying long-term U.S. Treasury bonds. I am at a loss to understand why they would want to do that. Lowering long-term rates would theoretically make borrowing cheaper. An implicit assumption is that lower rates would encourage long-term investment in plant and equipment. The problem with that theory is that large corporations already have record amounts of cash to invest but are still not investing in long–term projects. They believe there is simply too much uncertainty within our political system, our regulatory environment and in the economy to warrant additional investment right now.

As for smaller corporations, those that represent the majority of America’s work force, only those businesses that don’t really need to borrow are eligible for loans. It is not the level of interest rates that prevent banks from lending. It is the uncertainty that loans to small businesses will be paid back that has created an almost complete cessation of new lending in that arena. It has already been shown (via QEII) that banks are not willing to lend no matter how low rates fall.

In any case, it is not our economy that has been driving markets lower. The financial problems in Europe are what have most investors spooked. Make no mistake, Europe's problems are serious and their leaders have yet to come up with a decisive, comprehensive plan to deal with their financial problems. The Fed's actions here won't resolve the problems on the other side of the Atlantic.

In summary, unless the Fed pulls a bull-sized rabbit out of their hat tomorrow, the markets will swoon. Let's see what happens.

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: Europe's Banking Crisis

Investors are selling first and waiting for the facts later. Few can blame them given their experience in 2008-2009. Investors in the stock market sustained huge losses by naively believing that the financial sector and the government were in control of that crisis. This time around, no one believes anything they say.

The problem is compounded by the fact that this financial crisis is located in Europe where different rules apply, where the political and financial systems are different and where even the time zones play a part. Wednesday's panicked selloff was largely a result of a front-page story in the Wall Street Journal that revealed that the Federal Reserve Bank is scrutinizing the U.S. subsidiaries of all the European banks.

The Fed is worried that Europe's banks, faced with a dwindling supply of cash to pay off loans and remain solvent, are emptying the cash coffers of their U.S. operations. The latest Fed data, according to the WSJ, indicated that over the last three weeks, the cash reserves of these American subsidiaries have declined by 16 percent.

There was also a mention that one European bank borrowed $500 million in a one week loan from the European Central Bank at a higher interest rate than could be borrowed from fellow lenders at a cheaper rate. Investors sold first, assuming that, in at least this one case, some European bank was in deep financial trouble and where there is smoke there is usually fire. The facts do not support that conclusion — at this time. European banks still have massive reserves here, as much as $600 billion or more.

"At this time" is key because Friday the facts could change and during our financial crisis the facts did change, to our detriment, quite often. Because of our recent past, investors have no faith in either government's or the banking community's ability to solve our economic or financial problems. We have even less faith (if that's possible) in the European Union. Some of that disbelief is warranted. After all, the EU is an economic, not a political union. Given that there has never been a successful union that did not incorporate both politics and economy, the Achilles Heal of Europe is now surfacing.

This week the Europeans tried several initiatives that disappointed investors. First, several European nations announced new rules to prevent short selling of their banking stocks. The U.S. did the same thing during our financial crisis which proved to be both short-lived and completely ineffective. Within three days those same banking stocks were down 10 percent or more as investors simply found new ways to sell those stocks.

A meeting between Germany and France on Tuesday had the markets hoping that the two power houses of Europe would announce new, sweeping initiatives that might finally come to grips with the spreading European crisis. Instead, Chancellor Angela Merkel and French President Nicolas Sarkozy proposed that Euro-zone leaders should meet more often and recommended appointing a new Euro-zone chief, but didn't say what kind of power they would have in dictating EU policy. Big deal!

Remember the $157 billion Greek bailout that was supposed to be signed, sealed and delivered? Well, not quite; it appears several nations want cash-strapped Greece to provide cash as collateral in exchange for their participation in the bailout loan. It seems a growing swell of anti-bailout sentiment is rising in an increasing number of countries.

Coupled with these disappointing developments, Germany's most recent GDP second-quarter data indicated annualized growth has slowed to 0.05 percent. That punctured any hope that Germany, whose economy was considered the locomotive of Europe, would continue to support overall growth of the 17 Euro nations. Add a banking crisis, coupled with a deep distrust of existing authority, the increasing fear of a double-dip recession and the lack of political unity equals a continued wave of panic selling.

What could turn this around? A once and for all comprehensive plan by Europe to solve their burgeoning debt crisis might be the answer. But can that be done without addressing the "Elephant in the Room," i.e., political unity? Probably not, if a politically-divided U.S. Congress can't come to an agreement on our economic issues, how hard will it be for the EU to do the same?

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.