@theMarket: Where Oil Goes, So Goes the Market

Stocks had a tough week. All averages are now negative for the year once again and will continue to go lower until oil finds a bottom or the market disconnects from energy prices. The problem with that scenario is that no one knows if and when that will occur.

The price of crude is down 14 percent since December 1 and 35 percent since May. Controversy rages over whether the precipitous decline in oil over the last year from $114 a barrel to $36 a barrel is a supply or demand imbalance. New technology in the form of hydraulic fracking has unearthed a huge new supply of natural gas and oil worldwide. So much so that consuming these new sources of energy will require decades. At the same time, slow economic growth worldwide, especially in emerging market economies, has dampened demand for energy.

Whether the cause of the decline is one or both, the results are the same. Since May, the world has been experiencing a 2 million barrel/day gap of oversupply. What is interesting is that gap remains the same to this day. It hasn't worsened, although the oil price has declined double-digit in the last eleven days. Why the discrepancy between the fundamental facts and the price level?

Blame it on Wall Street. Financial manipulation in the futures markets seems to be responsible for the 36 percent decline in prices we have experienced since May. Traders have been shorting energy futures contracts hand over fist at the Commodity Markets Future Exchange and that practice accelerated after last Friday's disappointing OPEC meeting.

One can debate the logic of selling stocks simply because oil has declined. Bears will argue that as the oil prices go lower, the chances go up that energy companies will not only suffer earnings declines and cut dividends, but "many" may actually go bankrupt. That could also impact the corporate bond market. No question that could happen.

We have already experienced disappointing earnings from the group and just recently some energy master limited partnerships have cut their dividends. More are expected.  But one must ask how much does the energy sector represent within the stock market? If we look at the benchmark index, the S&P 500, the energy weighting is currently 8 percent and yet its troubles have taken the whole market down in excess of 3 percent just this week.

This is clearly a case of the tail wagging the dog.

Yet, no matter how irrational the market's behavior, what you don't want to do is get in the path of a speeding train. I'm not advocating selling right here, but I also don't want to be buying anything until I see how this energy free-fall plays out. I can't tell whether the clearing price for oil is around this level or at $30 a barrel or even lower. Until that becomes clearer, remain on the sidelines.

In the coming week, we also have the final Federal Open Market Committee meeting of the year. The bond market is giving an interest rate hike at the meeting an 87 percent probability.

Although I believe the market has already discounted that event, the coming rate hike is not helping matters. Still, I think all these worries are short-term in nature.

Sometimes, for a variety of reasons, the market ignores the fundamentals and instead focuses on the animal spirits that sometimes run rampant in the markets. This is one of those times.

At some point in time, when an oil-Armageddon does not materialize, the market may simply focus on something else. If I were a betting man, I would say that we rally after next week's FOMC meeting into the New Year. At these levels, however, all we will gain back is a single digit gain for the year. I'll take it.

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: Markets Climb Wall of Worry

It was a week of geopolitical risks and yet the markets managed to hold their own. True to form, investors were bound and determined that this would be a good week for stocks and it was.

Historically, markets do well on Thanksgiving week and this was no exception. Since the turn of the last century, stocks perform well (at least two thirds of the time) during this 3 1/2 day trading week and into the end of the first week of December. So far, this year has been no exception.

Given the headline risks, its performance was quite impressive. Investors had to contend with the shutdown of Brussels for most of the week as authorities ransacked the capital of Belgium in pursuit of suspected terrorists. At the same time, the rest of Europe was on high alert for terrorist attacks. In our own country, Thanksgiving, the largest travel period all year, has security folks worried. The Paris terrorist attacks have provoked concerns that the nation's many parades and other celebratory events could be prime targets for Jihad crazies.

On Tuesday, global investors woke up to the downing of a Russian plane over Turkish airspace and all that might portend. U.S. stocks took a nose dive on the news but by the end of the day there was quite a bit more green than red in the averages. That was another encouraging sign.

As Black Friday approaches, investors will also be wondering how the nation's retailers will fare. See my column "How black will this Black Friday be?" for details. My own belief is that stores will do OK, but no records will be set. Black Friday is not what it once was as many consumers have moved on from door busters and long lines on this holiday.

Overall, if one steps back and looks at the market's performance since August, the signs are encouraging. We had the long-awaited pullback in August-September; followed by a huge recovery in October into November, another minor sell-off, and we are now approaching the highs of the year. It seems to me, a classic stair-step climb that could translate into new highs in December. But first we must take out the most recent highs set in November, on the S&P 500 Index that would be 2,109 and on the Dow, 17,910.

Stocks will also remain volatile right up to the New Year. Several big events are scheduled for this coming month. We have the last FOMC meeting and a high probability of the first hike in interest rates on December 16th. We also have an OPEC meeting on December 2. That meeting has some guessing that Saudi Arabia may become a little more cooperative in supporting oil prices at this level.

We are also expecting a decision from the IMF concerning China's currency, the Yuan. China has been lobbying the organization for years to allow the yuan to become a reserve currency along with the dollar, yen, British pound, the Euro and Swiss Franc. If so, that would most likely be greeted favorably by the Chinese market and global markets as well. Then we have the European Central Bank's decision whether or not to add more stimuli to their economies.

All of the above could well be market-moving events and not necessarily all will be positive. Throw in the traditional Santa Claus rally somewhere along the way, and you have the makings for a rather turbulent sleigh ride. But I do digress. What is important is that you all have a wonderful holiday. Take a moment and remember all that you have to be grateful for. I know that I will. Happy Thanksgiving.

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.

@the Market: Buy the Dip

Markets sold off this week but not everywhere. While the U.S. and Europe suffered a bout of profit taking, parts of Asia did fine. Investors should expect more volatility on the home front next week.

The mood among investment advisors was somber, if not downright bearish, at the Schwab investment conference in Boston. Over the last week, hundreds of money managers, including yours truly, sat through educational and investment sessions given by some of the best minds on Wall Street. Why so glum?

Many were worried that global growth would continue to slow and drag our economy down with it. Then there were the Fed Heads, who changed their mind about a December rate hike for the umpteenth time. Now, the odds are better than 70 percent (up from 30 percent) that the Fed will raise rates next month.

Given the current level of the stock market, which is close to all-time highs, most investment advisers are better sellers than buyers. Contrarian that I am, I think that is a mistake. The Schwab equity strategy team, Liz Anne Sonders and Jeffrey Kleintop, tend to agree with my view. Kleintop, Schwab's global strategist, pointed out that world GDP next year was forecasted to grow by 5 percent, according to the OECD, IMF and World Bank. He is also expecting global economic data will continue to surprise us on the upside between now and the end of the year.

Sonders, Schwab's U.S. equity chief, believes here at home a recession is several years away. It's her opinion that our economy is getting very close to "escape velocity." That's a term used to describe the ability of our economy to grow on its own, independent of any help from the Federal Reserve Bank.  She also thinks the Fed will raise rates in December, barring any unanticipated slowdown in the economic data between now and then.

There are, however, some issues confronting the economy that indicate that it won't all be smooth sailing in the weeks and months ahead. Although we have gained 13 million jobs since the financial crisis, which is a good thing, the flip side is that small businesses are having trouble finding workers.

We are also grabbling with an earnings recession. Profits over the last two quarters have been down, versus last year's results, and that is expected to continue. The rising dollar, energy prices, and a slowdown in China are among the causes of these disappointments. Corporations have been able to mask this decline by buying back more of their shares on the open market. This has the effect of boosting their profit per share (simply because they have less shares outstanding) but even the most naïve investor is beginning to see through this ploy.

Clearly, the above issues bear watching, but are not enough to derail the bull market. The days of double-digit gains may be over but we can still see respectable single digit growth from stocks. It all adds up to more volatility in the stock market in the months ahead.

This week was part of the readjustment in thinking among investors that is necessary as the Fed prepares to hike rates. Remember, two thirds of the nation's money managers have never experienced a rate hike by the Federal Reserve Bank. Fortunately, I'm not one of them.

As I predicted last week, the markets need to consolidate after several weeks of gains. It is nothing to worry about; just the usual give and take within the markets. If you have a little cash to spare, this would be a good time to put it to work.

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: How High Will We go?

The markets have two months to recoup their losses and deliver positive returns to investors. With this year's correction behind us, the question to ask is will the markets deliver positive returns for 2015 and, if so, what will they be?

As October comes to an end, historically the month of November is positive for the stock market. December and the traditional Christmas rally it typically generates combine to make these two months the best period for positive returns all year. Chances are high that this year the stock market will perform according to this behavior pattern.

I say that because so far in 2015, if you had followed the historical behavior of the markets: "sell in May," "expect at least 2-3 or more pullbacks per year," and the warnings that "the first half of October is usually volatile," you would not have been steered wrong.

As we trade today, the S&P 500 Index is slightly positive (1.5 percent) for the year. The Dow Jones Industrials is essentially flat, while the NASDAQ has done better, up 7.4 percent for 2015. I am expecting that all three averages will gain from here through the end of the year. The NASDAQ will most likely outperform the other two averages, but not by a wide margin.

As I have said all year, I expect a single digit return from the S&P 500 Index, but will that mean 1 percent or 9 percent? That's quite a range and the outcome could have a significant impact on your returns for the year. The low end of my range would see the S&P to hit 2,150. That is only another 2.3 percent gain from here. In total, that would generate a 2015 return of 3.8 percent for this benchmark index. On the other hand, if over the next two months the bulls get to see all their wishes come true then we could achieve as much as 2,250 on the S&P 500 Index. That would generate roughly an 9 percent return. What would need to happen in order for that wish list to come true?

One item on that list has already come true. The political issues that were bugging the markets are now off the table — debt ceiling, budget debate, a new speaker — thanks to this week's compromise in Washington.  

Bulls are also betting that the economy will continue to muddle through, neither too warm nor too cold, so the Fed won't take any action on interest rates in December. Energy prices will remain at this level, providing lower costs for both the consumer and corporations.

That will translate into more money for the consumer, who will be willing to spend more this holiday season. That should generate additional sales and profits for the retail sector. On the international front, both China and Europe will continue to stimulate their economies and that will support global equity markets.

I do believe that much of the bull's case will come true, although it will require good timing, some luck and cooperation from a number of sources. What can go wrong? The Fed could fool us. The dollar might spike higher. The weather, given El Nino, could turn frigid, fueling higher energy prices. Overseas central bankers and governments may not cooperate or change their minds. I could go on, but you get the point.

Whether the bulls get their way, or we have to settle for something less, my worst case scenario is still fairly positive for the markets. Especially for those of you who thought the world was coming to an end on that Dow 1,000 point down day in August.

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: Regaining the High Ground

As of today, the S&P 500 Index is in the plus column for the year. That seemed impossible to most investors just a month ago. And I expect more gains to come over the next two months.

In last week's column, I predicted the worst was over and the price action this week confirms that. This will be the fourth week in a row that U.S. markets have generated positive returns. The engine of growth behind these further gains this week came as no surprise to me.

I have argued repeatedly that the monetary stimulus programs underway by central banks across the globe would keep stock markets climbing. Last week I wrote that "The ECB launched a stimulus program at the beginning of the year. Investors not only expect that to continue, but possibly be increased if economic data warrant it." Evidently, economic data warranted it.

Thursday morning, ECB President Mario Draghi hinted that investors could expect further stimulus in December from the central bank. World markets greeted the news by gaining between 1-3 percent (depending on the country) by the end of the day.

I also mentioned China was another country where "every negative data point will convince investors that the government there will need to stimulate monetary policy further." Their GDP for the year was announced last weekend. It was 6.9 percent, a bit below the government's stated growth target of 7 percent.

Before the U.S. market opened this Friday (and after the close in Asia), China's central bank officials announced another (their sixth) cut in interest rates by one quarter percent. This further fueled gains in both Europe and America. One can only expect that Asian markets will move higher on Sunday night as a result.

In the weeks ahead, I would expect the discussion among Fed Heads to intensify as a result of these new monetary initiatives. Right now, the handicappers are giving a low probability to a rate raise in December.  That could change, if the macro-economic data both here and abroad gather strength. The dollar will also be a renewed topic of concern, since a hike in rates here and a decline in interest rates elsewhere will lead to a stronger dollar.

In the meantime, we still have earnings to worry about. Although the majority of companies have "beat" earnings, revenue and guidance tells a different story. Only 40 percent of companies thus far have raised revenue guidance, blaming the strength in the dollar for these disappointing numbers. Of course, there have been exceptions in the middle of these lackluster results. Some of the biggest names in the technology space have done quite well in both the top line (sales) as well as the bottom line (profits). That has heartened investors somewhat.

As for the markets, we have already topped my short-term targets. My next target on the S&P 500 Index is 2,100. Remember that the year's high is only 34 points above that. By now you should also know that nothing goes straight up, so expect some consolidation. We remain on track to see single digit gains from this index by year's end.

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.