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@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.
@theMarket: Banking Crisis Still With Us
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Altogether Moody's downgraded a dozen of the world's largest banks, those hardest hit had the largest exposure to capital markets activities. These are banks that take huge positions in stocks, bonds, derivatives and other securities. New rules implemented by Congress after the financial debacle of 2008-2009 was supposed to prevent our nation's banks from ever-again becoming embroiled in risky securities that few understand.
However, just recently one of these down-graded banks was brought before Congress to explain their mega-billion dollar loss in just such a set of derivatives. In other words, the risk that we could see a repeat of the financial melt-down is still with us. Moody's downgrade is an acknowledgement of that fact.
This banking conundrum is why the economy is still stuck in second gear after three years of Fed stimulus. The Fed pumps trillions of dollars into the banking system, which lowers interest rates and encourages lending but the banks won't do it. Yesterday I wrote in my column "Let's Twist Again" that banks continue to ration credit to those who need it most, consumers and companies with less than perfect credit ratings.
Since lending has traditionally been the bread and butter business of the banking sector, these banks have to look elsewhere for ways to make money. So they speculate in the capital markets using all the cheap money the Fed provides them. Speculation carries its own risk but they would rather risk billions in the derivatives markets than trillions in lending to their customers. Go figure!
Markets did react not well to the banking downgrade or to their disappointment in the Fed's extension of Operation Twist to the end of the year. They were looking for some grander gesture from the central bank. Both events gave investors the excuse they needed to take some profits after the hefty gains of the last two weeks.
In my opinion, this is just the kind of pullback I was hoping for when I advised readers last week to re-invest their cash. I had warned investors that the stock market could very well pull back to the 200 day moving average, which on the S&P 500 Index is at the 1,285 level. From here it is only 2-3 percent of downside while I believe the upside could easily be double or triple that.
Today in Rome leaders of the Euro-zone's big four economies — Spain, France, Germany and Italy — are meeting to hammer out further solutions to their debt crisis. These talks will set the stage for next week's European Union summit in Brussels. Investors have high hopes for some additional action by the EU and the ECB during that summit.
Time and again, however, investors have been disappointed by the results of these summits. I have warned investors that the market's timetable and that of the EU is vastly different. Markets want solutions now but EU officials have a longer time frame. Changes among their members require negotiation, consensus-building and a bit of horse-trading. Many members, especially among the stronger economies, have traditionally taken a "wait and see" attitude to events. Over the past two years that has resulted in an atmosphere of crisis management.
Bottom line: look for more of the same in the coming week, which may give investors further opportunity to get back in the market at a reasonable price.
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: Risk On
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I would rather be in the markets going forward, despite the possibility that voters may elect the more radical, anti-austerity party. If so, the markets would probably sell-off. I would be a buyer of any further stock market declines.
On the other hand, the more moderate parties might win in Greece and markets would rally next week on the news. Either way, I am a buyer even though the markets could still experience a sell-off. Something could go wrong in the short-term and we could see the 1,250 level tested on the S&P 500 Index. I would simply buy some more if that occurs.
Why am I bullish?
Events in Europe are coming to a head. I believe that both the European Union and its central bank are going to backstop investors in the event that a crisis develops after this weekend's events. In other words, we may get a sell-off (possibly sharp, but short) before the European authorities step in and do whatever is necessary to calm the markets. I alluded to this possibility in my columns over the past few weeks.
Yesterday, Reuters and other news sources cited several unnamed EU sources who basically promised intervention if it becomes necessary. Markets jumped as investors realized that they now have a put against a financial calamity in Europe.
On this side of the pond, the Federal Reserve Bank Board meets next week. I am not looking for an announcement of another stimulus program, although if it were to be announced the markets would explode higher. There might be some disappointment if investors don't get what they want but once again, I would be a buyer of any sell-off.
You see, it is just about that time of the year (within a presidential election cycle) when investors begin to focus on November and the prospects for positive change in Washington, D.C. Now, neither you nor I really expect anything of the sort, yet, hope springs eternal in voters' hearts. I thought it would be useful to repeat what I wrote in my May 3 column "Sell in May ...":
A recent report from Ned Davis Research pointed out that the Selling May strategy doesn’t work nearly as well when it occurs in a presidential election year. They looked at every presidential election since 1900. Investors on average would have missed a hefty 4.4 percent gain as measured by the Dow Jones Industrial Average in those years by selling in May. If an incumbent wins, the gains are even higher (7.6 percent).Now, before you reverse course and buy everything in sight, a word of caution is appropriate. The same study did show that, on average, a correction did occur during the second quarter of presidential election years. The duration of the pull back is what differs.
Usually, a summer rally occurs after the second quarter sell off in an election year. When the incumbent party has lost the election, the summer rally fizzled out and the Dow made a new low in late October, followed by a weak year-end rally. When the incumbent won, the summer rally was stronger and the pull back in the fall was mild, followed by a strong gain into the end of the year.
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 Were They Thinking?
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In hindsight, the market's expectations made little sense. Why would European Central Bank (ECB) President Mario Draghi, speaking earlier this week, announce a new stimulus package prior to the outcome of Greek elections on June 17? If the moderates win, and there is a 50-50 chance they will, then there may be no need for any kind of immediate stimulus.
Granted, the declining economic picture in Greece certainly helps the anti-austerity, pro-growth, radical opposition party. Unemployment is now at 21.9 percent. The economy shrank yet again in the first quarter as a result of spending cuts and taxes. GDP is now declining at a 6.5 percent annual rate. But miracles do happen and the moderates could prevail in next Sunday's elections, despite the dreadful state of the country's economy. But the ECB is certainly going to refrain from doing anything that might influence that election — including any stimulus initiatives.
Here in America, the buzz was that Chairman Ben Bernanke was going to announce another stimulus package or extend the Fed's present stimulus "Operation Twist," (which ends at the end of this month). Once again I thought this kind of speculation was coming out of left field. In his testimony on Capitol Hill on Thursday, Bernanke delivered a carefully balanced view of the economy without any new stimulus announcements. Instead, he reiterated (as he has done in every Fed statement) that the central bank stands ready to intervene if necessary.
What both Bernanke and Draghi did say was there is a strong and immediate need for politicians on both continents to step up to the plate and deliver on their policy responsibilities. Reading between the lines, we should understand that central bank intervention (without fiscal action) becomes less and less effective. Bernanke said as much to his audience in the Q&A section of his appearance before the Joint Economic Committee of Congress.
Obviously the markets got it wrong this week, although the hope and a prayer stimulus stories did provide the excuse to push the S&P 500 index up almost 3 percent. To those expecting a snap-back rally, like me, the point is that the markets were oversold and due for a bounce; how we got there is immaterial.
So what happens next? As I said last week, we are getting close to a bottom. A good guess would be a low somewhere around 1,250 on the S&P 500 Index over the next few weeks. I'm sorry I can't be more precise, but it is a tough market and there are a lot of moving parts that aren't easy to decipher.
For example, China cut its key interest rate this week by 0.025 percent. Investors took that as a positive sign, hoping that it signaled a round of further cuts in the months ahead. Since growth in China (or the lack thereof) is vitally important to global growth prospects, investors were bolstered by the development. However, a slew of economic numbers are being released this weekend in China. Some China watchers worry that the data will be much worse than expected. If so, investors won't take kindly to that news on Monday.
Then there is the meeting this weekend between Spanish authorities and finance ministers of the EU. News sources believe that Spain will ask the EU's help in bailing out Spain's troubled banks. Bottom line: it is all noise that will insure that markets will remain volatile over the next week. Strap on your seat belts and welcome to summertime in the stock markets.
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.
