@theMarket: The Goldilocks Market

The S&P 500 Index made record highs this week. It is catching up with the Dow, which has been making new highs now for over a month. Yet many investors do not believe this rally. Some are still sitting on the sidelines waiting and praying for a pullback that has not occurred.

There is an old saying that the market will do what is most inconvenient for the greatest number of people. Right now this slow grind higher seems to be causing more irritation and angst than anyone could imagine among many investors. Those who are in and experiencing double-digit gains so far this year still worry about how high the markets have come and whether or not they should bail.

"I don't get it," complained one such client, "The data is checkered at best. The unemployment rate is too high, but the market seems to ignore all of it and just keeps climbing."

"It is a Goldilocks market," I explained. "As long as the economic data is neither too hot nor too cold, the markets will continue to rise."

It really doesn't matter that much whether earnings are good or bad or that the economic date is contradictory. It is all about the Fed and it's on-going stimulus. Weak numbers mean that the Fed will continue easing. This week's Fed announcements, following their two day policy meeting, only encouraged investors further.

Investors chose to read positive implications into the Fed's statement that they might "increase or reduce" the size of its monthly $85 billion purchase of bonds. It will depend on the rate of unemployment and inflation. Since inflation has dropped below the Fed's target of 2 percent annually, there is clearly a green light to increase bond buying if they want.

As for unemployment, not only is the rate way above its target (6 percent versus today's 7.5 percent rate), but the numbers are up one week and down the next. So given the state of both inflation and unemployment, the markets are betting that the Fed is at least going to maintain their buying. And if the numbers come in weaker than expected, there is a good chance they will increase their purchases. Thus, bad news is good news.

The good news, like Friday's unemployment numbers of 165,000 new jobs (140,000 were expected) or the greater than expected rebound in national housing prices, was tempered by negative news on other fronts. March factory orders declined by 4 percent (3 percent expected) and non-manufacturing ISM data, which measures the nation's services industry, was also a disappointment. That data presents a mixed picture at best. Taken together, the numbers hold out the hope for even more easing while at the same time remove the possibility of an end to further stimulus anytime in the near future.

Like I said, the national porridge is neither too hot nor too cold. It is just the way investors and the market like it. So where are the three bears in this story?

One bear could be that the economic data becomes so bad that investors fear even the Fed can't prevent a recession. The Fed (and I) has made it clear that "fiscal policy is restraining economic growth." That's Fed speak for the wrong-headed, ill-advised policies that our Congress insists on enacting, such as the sequester cuts. There is a possibility that our elected officials could engineer our next recession.

Another bear could appear if the economic data indicated much higher growth ahead then the Fed expects. That would force the central bank to reduce its bond buying. That seems a remote possibility given Congress' penchant for doing nothing, unless it involves increased fiscal austerity.

The third bear could be a "Black Swan" type of event. North Korea, Iran, Syria or some other geopolitical event could also cause markets to swoon. We saw how fast the stock market declined in the aftermath of the Boston Marathon massacre. Something like that could trigger a rush for the doors. That third bear is always present and one reason I advise all but the most aggressive clients to keep some of their portfolio in defensive securities.

So Goldilocks is alive and well today but unlike the fair maiden, it is always smart to remain somewhat cautious when investing in markets. After all, you never know who may be lurking under those covers in your bed.

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: Five for Five

It was another good week for the averages with all three indexes chalking up five days of gains in a row. Friday, however, was a mild disappointment thanks to the latest GDP data.

Economists were looking for a first quarter gain of 3 percent in GDP. Instead, the nation's gross domestic product came in at 2.5 percent, but it was still a good number compared to last quarter's 0.4 percent growth. The stock markets, however, have proven that they care less about growth and more about how much and how long the Fed's monetary easing will continue.

In this goldilocks market, good economic data is good news for stocks but also are disappointing economic numbers. I know that sounds crazy, but there is certain logic to this madness.

The Federal Reserve has promised to continue stimulating the economy until the unemployment rate drops by another percentage point or two. In order to achieve that target, the economy must continue to grow and grow at an increasing rate. So, according to the typical investor's logic, disappointing data simply means that the Fed will need to keep pumping money into the economy, which is good for stocks. Of course, if the numbers turn really sour and GDP drops precipitously then all bets are off. But 2.5 percent growth is not too hot or too cold and just enough to insure that the money keeps flowing into the stock markets.

All week Europe has rallied as well. There is a building consensus over there that economies both big and small need further stimulus and possibly an interest rate cut by the European Central Bank. "Austerity," both here and abroad, appears to be becoming a bad word for all but a few die-hard right-wing economists and their followers who we will call "Austerians."

Clearly austerity has not worked in Europe, has not worked in this country, and has not worked in Japan. As a result, what we are seeing is across-the-board movement toward further easing. I, among others, have been arguing for this since 2009.

Of course, those opposed have insisted that unless governments reduced their deficits and restored confidence, simply spending more would only increase debt loads (which are already at record highs). And once countries crossed a theoretical debt-to-GDP threshold, (thought to be 90 percent) they would experience a permanent slowdown in growth as well as hyperinflation.

This argument has raged on for five years with the austerity gang here in America gaining the upper hand this year. Thanks to the Sequester, we are now experiencing the impact of across-the-board cuts at a time when our economy needs spending, not cuts. Oh, and by the way, that theoretical line in the sand that the Austerians insist would sink the economy (based on an academic paper on the subject), was found to contain a mathematical error. Once the error was corrected, the 90 percent debt-to-GDP statistic went up in smoke.

Now, simply because the facts do not square with the Austerians' argument does not mean that they will cease and desist. There is too much at stake to quit now. After all, an entire wing of the Republican Party has been born again (and elected) under this theme. They will stubbornly insist on being right in the face of economic reality until we stop listening to them. In the meantime, despite our debt load and free-spending ways the stock market continues to go higher and higher. Imagine that.

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: Two Steps Forward, One Step Back

This week, for the first time all year the S&P 500 Index has sustained more than a 1 percent pullback. It needs to correct somewhat more, and despite the short term pain, this sell-off is a good thing.

Have you ever asked yourself why a tea kettle has a spout? It allows steam to escape so that the water within does not boil over. That's what periodic sell-offs accomplish in the stock market. Daily new highs, weeks of successive gains, chasing stocks — all of those indicators were out there. As I have written over the last month, it was just a matter of time before market discipline exerted itself. I'm hoping the decline will continue for a few more days and purge some of the excess exuberance out of the markets. So why not sell now and try to catch the bottom later?

If you can do that successfully, you're a better man than I, Gunga Din. But in the past, readers may recall, I have done just that. I have successfully told readers when to sell and when to buy back in 2007, 2008, 2010, 2011 and 2012, so why not now? The difference this time is the extent of the decline I am looking for.

In the past, each of my sell recommendations encompassed a correction in stocks of at least 10 percent. This time I don't see that. We may experience a decline that approaches the 10 percent level but, in my opinion, a decline of that magnitude is not warranted.

You see, unlike the last few years, I don't see the kind of market risk that precipitated big declines. The EU, Greece, Washington, U.S. debt downgrades, as well as fiscal and monetary uncertainty has been replaced with what — Cypress? Bumpy unemployment numbers? North Korea sabre rattling?

None of the above has the power to crater this market. The present concern over the last few weeks' jobs numbers should be put in context. Remember that a lot of construction jobs were created by Super Storm Sandy, however, those repairs are winding down. At the same time we are starting to feel some of the ill-advised (in my opinion) sequester cuts starting to show up in the data.

Clearly those cuts will do little good for the economy but they won't sink it. As long as the Fed keeps pumping dollars ad infinitum into this economy we are all sitting pretty. On the plus side, the recent decision by the Japanese monetary authorities to follow our central bank's lead and stimulate their economy to the tune of 7.5 trillion yen is truly unprecedented.

I was talking to a 30-year veteran of Japanese investing, Michael Longthorne, a managing director of Mizuho Securities, who described the move as "strapping a rocket onto a go cart." We concluded that after over 20 years of economic stagnation, there is the potential that the world's third largest economy (after the U.S. and China) could become a real factor once again in global economic growth in the years to come.

Bottom line, markets will use just about anything as an excuse when a pullback is overdue. My advice is to ignore the jibber jabber, ignore your short-term paper losses and look forward to a good year of double digit gains in your investment accounts.

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.

Market Watch: Looking for an Excuse

You may be wondering how an island nation with an economy smaller than Vermont could set the world's stock markets on edge for most of the week. The short answer is the markets are looking for any excuse to take some profits.

That's not to say that I am ignoring events in Cyprus, a small island in the Mediterranean with a bit over a million inhabitants. The Cyprus problem is simple. Their banking system holds $176 billion in deposits — about eight times the nation's GDP — and some of these banks are in deep financial trouble. They need a bailout similar to the rescue packages given to Greece, Ireland and Portugal.

For the first time since the financial crisis began back in 2008, the EU has changed the rules for a bailout. In exchange for $13 billion in funds, the Cyprus government must raise $7.5 billion on their own. To do that, the EU wanted them to tax all their country's bank accounts of 100,000 euros or more (about $130,000). What would you do if that happened here?

Two words: Bank run. As soon as Cypriots got wind of this scheme they stormed the ATMs of all their nation's banks, but they weren't working. Then the government said they would take steps to prevent any money from leaving the country. Chaos ensued. Parliament convened and it only took until Tuesday before the Cypriot government rejected the scheme out of hand. That still leaves the question of how and under what terms the country will be able to receive a bailout.

What spooked investors was the possibility that what happens in Cyprus could happen in other parts of Europe. Was the EU signaling a new and potentially damaging approach to Europe's financial problems? Would bank depositors in Spain, Italy or elsewhere be next? This is serious stuff, since the only thing keeping a depositor's money in any particular bank is the belief and trust that their money is safe. If there was even a possibility that some government in financial distress might swoop in and "tax" 10 percent of your money, what would you do?

So the specter of a potential bank run throughout Europe was one of the "what if" scenarios making the rounds of Wall Street this week. It seems to me that every governmental financial institution around the world has gone to extreme lengths to convince depositors that their banks are safe. I can't see what anyone would have to gain by changing that policy.

It may simply be that since the lion's share of high net worth depositors in Cyprus happens to be Russian moguls, the EU may be trying to scare the Russian government into becoming a part of a Cyprus bailout plan. Who knows?

As for the U.S. market, you know my opinion. I'm bullish, but expecting a pull back. Investors used this obvious piece of negative fluff as an excuse to sell a little stock. If one looks hard enough, you can and will find something to worry about. This week it was Cyprus. Next week there will be something else. Stay invested.

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: The Blame Game

If it wasn't such a national embarrassment, the finger pointing going on among our so-called leaders would be comical. Nonetheless, it is March 1 and time is up. Bring on the Sequester.

Our congressional leaders made a big show today at the White House sequestration meeting. It was their first such meeting on the subject to date. I considered it a photo op at best. This week, rather than attempt a compromise, both Democrats and Republicans spent their time blaming each other for the Sequester.
 
From the GOP point of view, it is "the president's sequester" while the president is blaming the cuts on the Republican's failure to act responsibly. Since it was the Budget Control Act of 2011 that first authorized the Sequester, (if the bi-partisan "Super Committee" couldn't come up with a compromise solution to reducing the deficit), let's look at how the final vote panned out.

One hundred and seventy-four Republicans voted for the measure but only 95 Democrats. The final tally was 269-161 with just about all of today's GOP leadership voting yes. These are the same characters who now claim it was Obama's fault. All of this name calling is a smokescreen to hide an even more important deadline that occurs at the end of March.

On March 27, Congress will need to pass a "continuing resolution" (read short-term spending plan) or funding for the Federal government will expire. Yes, my long-suffering readers, without a deal between the two parties the government shuts down. Continuing resolutions are stop-gap measures that keep the lights on in Washington, absent a formal budget. We haven't had one of those in years because of political partisanship.

The threat of a shutdown actually will force Congress to act since, unlike the more subtle and slower-paced sequester cuts, a total shutdown of the government would be highly visible and extremely disruptive. It would not be pretty. Either congress will agree to keep the sequester cuts as is or it will have to come up with an alternative set of revenue increases and spending cuts.

In the meantime, both parties will have had almost a month of dealing with irate airline passengers, defense contractors, various agency heads, parents of Head Start children and the like. So this week's failure to compromise is simply setting the stage for a bigger cliffhanger, much more drama and, I suspect, heightened volatility in the stock market.

Readers may have noticed that over the last two weeks volatility has escalated among the averages. We will most likely see more one percent up and down days as March unfolds. Washington seems to be providing the justification for the pullback I have been expecting. So with headwinds strengthening, one wonders just how long the markets will be able to shrug them off. But let me be clear: I don't expect a market route, simply a nice pullback that stocks sorely need in order to advance further this year.

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.