@theMarket: Now What?

Unless you have been living in a vacuum, you are keenly aware of the stock market's freefall. Panic is in the air and rumors are swirling around the Street's trading floors. It is time for investors to step back and take a breath.

If you are worrying about your retirement accounts, don't. This is not 2008-2009. Much of what is going on in the markets is a result of conjecture, not facts. No one knows if we are going into another recession. No one knows if Italy is going to go bankrupt, no one knows the future. At most, we can only make educated guesses.

Let me first admit that I was definitely wrong last week when I posed the question "Buy or Sell" in my column. I advised readers to hold onto their investments. Like many others, I was expecting a rally in stocks after the successful passage of a debt-limit increase. Even though I expressed my deep concerns over the weakening of the economy, I was caught like everyone else going the wrong way when the markets dropped through the floor. That said, I believe it is too late to sell and, if I do, I will wait first for a bounce.

Selling a market already down 12 percent in 10 out of 11 days is not a smart move. We are close to, if not already in, that zone of capitulation where panic takes over and investors want out at any price. Thursday was over a 95/5 day during which 95 stocks were sold for every five purchased. The New York Stock Exchange Index is so oversold that it registers a minus-2 standard deviation (SD). These are all signs of a near-term bottom.

My friend John Roque, technical strategist over at WJP Capital Group, indicates that when stocks are this oversold, a relief rally is not far behind. In 100 percent of the cases over the last 30 years where a minus-2 SD occurred, the markets have bounced anywhere from 2 percent to over 10 percent within two weeks. Three months later, the same markets gained 3.6 percent to 34 percent. So the odds are in your favor that selling now would be a losing proposition.

"OK, I wait for a bounce," says a client from Becket, "then what?"

That depends. Many times after a relief rally (sometimes called a dead cat bounce) the markets return to, at, or near the lows before moving higher. At other times, there is a week or two of pause before markets resume an upward climb. Last year, the S&P 500 Index lost almost 18 percent and then rallied straight up with no retest. It could happen again but we will need to get the bounce first before guessing at its durability.

The reason this correction feels so different from last year's is the compressed nature of the decline. What took four months to accomplish in 2010 has taken only 11 days thus far this year. In some ways, a short sharp correction is better than a drawn out death by a thousand cuts kind of correction, although both are painful.

So here's my game plan: stay invested, wait for the bounce, when it occurs sell some of your most aggressive investments and see what happens. If we retrace, buy at or close to the bottom. If we continue to climb, the worst that can happen is you miss a few percentage points of gains. But remember, preserving principle is your No. 1 concern. Profits should come second. 

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: One Down, One to Go

On Friday, the European Union announced a new $157 billion bailout plan for Greece. The scope of the plan went much further than most investors expected. It promised to finance all countries that need bailouts for as long as it takes for them to recover. There's more.

I refer to the new plan as the "Full Monty" (see my column "Europe Goes the Full Monty") because it is the first time in the 18-month long crisis that European leaders were willing to draft a comprehensive approach to the financial crisis among the PIGS (Portugal, Ireland, Greece and Spain).  The plan will be proactive in heading off any further financial contagion among its members while fencing in those that already are in trouble (Portugal, Ireland and Greece).

The deal does allow for a "selective default" in Greece, where some but not all of its debt will be written off or renegotiated at lower terms and lengthened maturities. The plan does not go as far as I might have wished but in the real world of European politics it appears the best that they could do. In my opinion, the crisis appears, if not over, to be at least contained for now.

That crisis is one of two large clouds that have been hanging over the markets for months. The other bailout issue is in our own backyard. And, as I suspected, our elected representatives are stretching out the tension as long as they can. Both sides are glorying in their extra media attention, using their 10-15 seconds of sound-bite glory to appear concerned, tough and "on your side" (while raising as much additional campaign funds as possible for next year's elections).

Here are a summary of client questions and my answers this week on this on-going travesty:

"Will the debt ceiling be raised by the August 2 deadline?”

I'm betting yes, but that still leaves 11 days of volatility in the bond and stock markets.

"What will happen after the deadline, if the ceiling isn't raised?"

As I wrote last week, the markets will decline in the short term, presenting a buying opportunity for anyone brave enough to venture into equities.

"Will the Gang of Six deficit-reduction plan be passed?"

I suspect some version of that plan will be passed but the question is when. The Republicans want to prevent any legislation that might improve the economy or reduce unemployment until after next year's elections. They hope voter frustration over the economy will propel their party's candidates into office and defeat a re-election bid by President Obama.

Unfortunately, the nation's financial credit agencies are not cooperating with the GOP timetable. They have made it clear that without a serious, comprehensive deficit–cutting plan in the ballpark of $4 trillion or more, they will cut the U.S. debt rating. I suspect we will be on "credit watch" until a deficit reduction deal is passed, which means that we will be assaulted by this back-and-forth bickering for some time to come.

"If and when the deficit plan is passed, can we go back to whatever normal is?”

That depends. I believe that cutting spending and raising taxes in an economy that is struggling to gain momentum exposes this recovery to extreme danger. Cutting spending too deeply while raising taxes too much (and shrinking the money supply) is exactly what nipped a fledgling recovery in the bud and sent the U.S. economy into a depression in the '30s. Ask yourself this question: do you feel confident that a bunch of madmen in Washington have the ability to strike just the right balance in order to grow the economy while reducing the deficit?

But let me worry about that. It will take weeks, if not months, for such a compromise to be worked out. In the meantime, this last storm cloud appears to be moving to the edge of the horizon for now. I expect some real progress on a compromise next week.

The economy may be inching along, but corporate profits are booming. This earnings season so far is seeing the vast majority of companies beat earnings and increase guidance. This debt crisis is repressing what should be a buoyant stock market. Like a coiled spring, stocks are just waiting to bounce higher. If and when the debt ceiling is passed, that will happen.

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: What If?

This week the scales finally tipped. The phones began to ring and each call was roughly the same.

"What are the chances the debt ceiling won't be raised?"

"What happens if the politicians can't make a deal?"

"What will happen to my investments if the worst case scenario happens?"

Since the calls were coming in from Maine, Vermont, New York, Connecticut, Massachusetts and elsewhere, I'm sure you are all worried about the same thing. If, despite the odds, the debt ceiling is not raised by Aug. 2, 2011, the United States of America plunges into at least a technical bankruptcy. What will happen to the markets? The short answer is nothing good.

This is not an abstract issue. The dollar, as well as global stock and bond markets, would decline. The price of gold and possibly silver would jump but very few other asset classes would be immune from the carnage. The wave of selling would reverberate around the world because everyone is involved in America's bond market. The duration of this financial rout would probably be short lived, a day or three, maybe even a week, before our political "leaders" in Washington came to their senses. Personally, I believe that it would be a classic buying opportunity and one probably not seen since the week after 9/11.

A recent poll by CNBC indicated that 64 percent of viewers are blaming the Republicans for the present impasses in the debt ceiling talks. As for me, I blame us, the voters — Democrats, Republicans (especially the tea party) and independents for the present dilemma. I wrote "leaders" in quotes because the present fiasco has convinced me that there are no leaders left in Washington, D.C.

But why should that surprise you? The present blame game that is substituting for compromise among the congressmen and senators is a joke if one looks at the track record of these supposed leaders. President Barack Obama continuously reminds us that the problems started during the Bush administration. But he was elected to the Senate in 2005, just as the real excesses of mortgage-backed securities was getting under way. Joe Biden was a senator from 1972 until running for vice president in 2009. Where were they when we needed leadership and an effort to end the rampant speculation that was occurring on Wall Street?

Rep. Barney Frank was the chairman of the House Finance Committee before and during the financial crisis as was committee members Orin Hatch, John Kerry, Chuck Schumer and even Ron Paul. All these august officials were asleep at the switch despite receiving a wealth of information daily on the nation's financial system.

Rep. Rosa De Laura has been around since 1990 and sits on the House subcommittee on Labor, Health and Human Services. Steny Hoyer has been in the House since 1986 and was House majority leader from 2007-2011 and House minority whip from 2003-2007. Nancy Pelosi was the speaker of the House since 2007 and is now House minority leader; that about sums up the background of today's starting line-up on the Democratic side.

Republicans, on the other hand, beginning with our past president, presided over the financial crisis from 2000-2008. During that period, Eric Cantor, Paul Ryan, John Boehner, Mitch McConnell and many more of today's "responsible" budget-cutting GOP leaders knew and did nothing but watch as the financial system spun out of control. They too have conveniently forgotten their past lack of leadership and are busily blaming the opposing party for their own shortcomings.

Today we are looking to these same men and women to compromise, to work together and fix the economy, balance our finances, raise the debt ceiling and solve the nation's unemployment problem. We elected them, despite the knowledge that these very same people have been found wanting in the past. Why should we expect them to be any better today?

So let the chips fall where they may. I expect that until we have a deal the markets will continue their schizophrenic behavior. The best thing you can do is hunker down and wait for this storm to blow past.  

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: The Bottom Is In

Well, we've made it through another pullback together. It seems clear to me that this week's stock market action is telling us that the worst is over — for now.

Yes, there are still a few dark clouds on the horizon. The closest one is the ongoing debate over increasing the nation's debt limit. Although I believe that in the end politicians will do the responsible thing and approve an increase, they are not beyond eleventh hour posturing. Few politicians can resist the chance to become the focus of the nation's attention by withholding their vote until all seems lost, only to relent at the last moment, thereby becoming our heroes. Disgusting? Yes, but that's what America's politics are all about these days.

As a result, expect continued volatility within the markets as te deadline approaches. The Obama administration claims we will run out the clock by July 22 while the Treasury is sticking with Aug. 2. The time it would take the Congress and Senate to ratify the debt increase accounts for the difference.

But the bias of the market, despite the volatility, will be toward the upside. It appears that investors are beginning to recognize all the positive factors that I have outlined over the past two months. Japan's economy, for example, is roaring back as indicated by very strong industrial production data this week. For readers who missed it, see my June 2 column "Japan, Is The Sun Beginning To Rise?" in which I both recommended Japan and predicted its rebirth. As it occurs, U.S. economic data will also start to strengthen. This Friday's manufacturing data, released by the Institute for Supply Management (ISM), is just a taste of what's to come. It showed the economy gaining strength for the first time in four months. Oh, and expect unemployment numbers to start dropping as well.

As you know, I have been arguing that the U.S. was in a soft patch of growth brought on by Japan's earthquake-related slowdown. Now that Japan is revving up, so will we. With Greece's problems resolved (at least until September) and oil prices heading toward $85 a barrel, Wall Street is finally waking up to what you and I have known for weeks.

Normally, after such a massive move, the markets should pull back to about the breakout level, which would be 1,300 on the S&P. It doesn't have to happen, but if it does, consider it a buying opportunity. For those of you who may have gotten cold feet during the tumultuous times of the recent past, that would be your chance to get back in.

As for the end of QE II, (see yesterday's column "The End of QE II"), all of the hyperbole you have been hearing about how interest rates would spike and the markets plunge did not materialize, nor will it. As I predicted, the demise of the Fed’s quantitative easing program is a non-event. With all these negatives removed from the market simultaneously, I expect stocks to roar. My price target for the S&P 500 remains at 1,450 or higher.

Once we get there, well, that may usher in a horse of a different color but first things first, the markets are going higher so enjoy your gains.

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: Better Days Ahead

After this week you should have either an upset stomach, stress headache or both. Human beings do not do well in markets that climb up and down by over a percent on a daily basis. Unfortunately, as this market bottoms, we may expect more of the same.

On the plus side, the Greek Prime Minister George Papandreou received a parliamentary vote of confidence this week. Yet, facing investors this week is a vote on the passage of the austerity plan that the European Community demands in exchange for bailout money.

Economic data continues to disappoint with the latest unemployment figures coming in more than expected. Wherever you look, gloom and doom pervades the minds and hearts of investors. On Wednesday, Fed chief Ben Bernanke didn't help by reducing the Fed's estimate for GDP growth in the second quarter from 3.1-3.3 percent to 2.7-2.9 percent. Even a 5 percent decline in oil was viewed as negative and simply another proof that the economy is faltering.

Most investors missed the point of Thursday's release of 60 million barrels of crude from the world's strategic oil supply. Pundits complained that it was too little to impact demand since it amounted to less than a day's supply of global demand. Others argued it was an act of desperation by an administration that has run out of ideas to stimulate the economy.

It was none of the above, in my opinion. Readers may recall that a few weeks ago prices of most commodities peaked after the CME raised margin requirements for everything from energy to silver. Speculators, who had bid commodity prices up to astronomical levels, abandoned the market in droves causing prices to decline to their present levels.

Most energy experts believe that the fundamental price where supply and demand for oil are in balance is closer to $85 in barrel. But notice oil, until this week it was still trading at $100 a barrel and above, (although down from its recent peak of $112 a barrel). Clearly, there were still a lot of speculators in the market, who could go either way. It was a tipping point where there was at least a 50/50 chance that traders might try and take the price higher once more.

To me, the International Energy Agency exhibited perfect timing. With a relatively small amount of released oil, they managed to drop the price of crude by $5 a barrel and send the speculators running for the hills. It has also added another element of risk since nervous traders will now have to be looking over their shoulder in case the IEA does it again.

As for the wall of worries that beset the market, all this pessimism is part of the normal process one expects as the averages descend to a level where buyers once again appear. Today we are probably within 1-2 percent of that area, if we are not already there. To me, the math is simple: a possible 50-point decline in the weeks ahead on the S&P 500 Index versus 150-200 points of upside. The risk/reward ratio tells me to not only hold the course but to buy on weakness.

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.