@theMarket: The Correction, At Last

At long last, we are having a pullback in global financial markets. Most investors would agree that it is long overdue. But now that we are in the midst of it, the bears are out in full force. Ignore them.

"Libya Rebels Tighten Noose" read Friday's headlines in the Wall Street Journal. The national media is devoting huge blocks of time and resources to cover unfolding developments in a country that supplies less than 2 percent of the world's oil. And yet both retail investors and seasoned professionals have been dumping stocks in panic this week. Who says markets are efficient? Honestly, these events may provide the drama and justification for the sell-off, but for me I care only for the outcome.

Yesterday oil hit $103 a barrel. For over a year, my interim price target on oil has been $100 a barrel. I promptly advised readers to take profits (see "Oil hits my price target"). If you missed it, you can read the entire story on my blog at www.afewdollarsmore.com.

The reasoning behind this sale is threefold: 1) contrary to the talking heads on television, I do not believe that these Middle Eastern rebellions will jeopardize global oil supplies and 2) I also expect that Saudi Arabia can and will easily make up any shortfall due to Libya's suspension of oil exports. Right now that shortfall is roughly 700,000 barrels a day.

Finally, U.S. economic growth is moderate at best. On Friday, for example, GDP for the fourth quarter of 2010 was revised down to 2.8 percent following a 2.6 percent rate in last year's third quarter. Those are less than half the growth rate the U.S. normally experiences in prior recoveries. Those numbers do not justify oil prices at existing levels. Today, oil is trading around $97 a barrel. I expect that we will trade in a $5 to $6 a barrel range until there is some resolution in Libya, and then prices should fall back.

Many investors were also surprised at the U.S. dollar's behavior during this latest crisis. The dollar has historically been perceived as a "safe" investment when other securities are not. In the past, its value has risen in uncertain times — but not this time.

Instead, gold and silver spiked higher as investors worldwide preferred precious metals rather than the dollar as a place to hide until this crisis passes. Gold and silver still have room to run and neither has reached my price target.   

Some market analysts argue that because this crisis is about oil, and not financials, the dollar provided little security since higher oil prices would clobber our economy. Economists claim that $100-a-barrel oil will knock a full percentage point off U.S. GDP. They point out that the currencies of Canada, Switzerland and Norway did move higher, however. Two out of these three countries are oil exporters and all are more energy efficient and have higher interest rates than the U.S.

I'm not sure I buy that explanation in its entirety. I have written before that we are in a transition period in which the U.S. dollar is losing its preemptive place among the world's currencies. In my opinion, it may still lay claim to being "first among equals" but over time the dollar will join with a basket of other currencies in providing a new global foreign exchange benchmark. This may simply be another sign that investor's behavior is changing.

As for this pull back, we have already dropped 3 percent or so on the S&P 500 Index. My forecast was for a 3 to 5 percent decline, so maybe we have seen the worst of it, or we might still have a few more days next week before it is over. Either way, buy the dip.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

This article was supposed to run Saturday morning but was accidently scheduled for a later posting date. We apologize for any inconvenience.

@theMarket: 707 Days

It's official: the S&P 500 Index is now up 100 percent from its low of 666.79 back in March 2009. It was the fastest double in stock prices since 1936. And it is not over.

I have suggested several times in past columns past that a big move in stocks would come when individual investors sold their bond holdings, gathered their courage, and returned to the stock market. That time may be upon us.

Consider that this is the fifth week in a row that inflows into domestic stock funds have increased. A total of $21.3 billion moved into equity mutual funds in January. The first week in February saw an additional $5.85 billion and last week another $9.3 billion flowed into equities.

The money is coming out of bond funds (mainly funds invested in U.S. Treasuries and Munis). As expected, the stock markets' five-month winning streak and low rates of return in the government bond markets and money markets are forcing investors back into equities. This has been my premise for well over a year.

Corporate profits are approaching record levels. The economy is gaining steam, inflation forecasts remain subdued (2-3 percent/year) and interest rates are historically low. That is what I call a "sweet spot" for making money in stocks. But the market's steady rise since the beginning of the year, with little to no corrections, has also confounded veteran market watchers. Some respected technical analysts I know have actually given up trying to predict the timing of a pullback. The truth is that a correction can happen at anytime, but so what. Buy the dip.

Consider that the U.S. market continues to rise in the face of tensions in the Middle East, soaring global commodity prices, declining stock markets in the high growth emerging markets and continued financial concerns in Europe. In the past, any one of the above circumstances has had the power to take our market down 5 percent in a blink of the eye. But thanks to "Bennie and the Fed," investors own a "put" on our market. Back in November in my column "Don't Fight the Fed" had the following explanation for why the market would continue to rise:

"The Fed is clearly telegraphing to investors that they want a higher stock market, and like unemployment and the economy, they will do what it takes to accomplish that goal. This message is behind the jump in the stock market this week. My advice to you is don’t fight the Fed. Buy stocks.”

I stand by that advice.

On another note, have you been watching the price of gold and silver? A few weeks ago I suggested that the price correction in both these precious metals was just about over. Since then both gold and especially silver have roared back to life. Silver is above $32 an ounce. It is getting closer to my target of $36-$37 an ounce, so be ready to take some profits when we reach that price level. Gold has lagged silver so far, but I believe it will ultimately narrow the lead. Nonetheless, both metals performance have been far from shabby.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

@theMarket: Stop Worrying About Inflation

Here is a sampling of comments I received this week from Berkshire clients:

"Just wait until higher prices start hiking the inflation rate."

"Interest rates are rising because of inflation."

"Look at the government deficit disaster, the only thing we can do is inflate our way out of debt."

It is as if everyone in the United States is absolutely convinced that we are on the verge of hyperinflation. And yet the inflation rate remains below the Federal Reserve's target of what is considered a healthy rate of inflation. It's time I cut through the hyperbole and set things straight for you and I.

I believe that until the unemployment rate drops substantially, inflation in the U.S. will be contained to no more than 2 or 3 percent.

In the meantime, in order for the housing market, the banking sector, the nation's unemployed and the economy overall to improve, we need to spend more money and ignore the deficit for now. The Fed has it right. Drown the system with dollars until even the most recalcitrant lender has no choice but to lend despite the perceived risk.

Commodity prices are rising because of 1) terrible weather and 2) economic recovery worldwide. Those price increases may or may not be inflationary depending upon where you live and do business. Additional demand for wallboard by a local builder, for example, is a good thing because there is a lot of excess capacity right now in the U.S. The same is not true for Chinese or Indian builders, who are populating their country's skylines with thousands of new buildings. For them, higher prices for every additional nail, two-by-four or steel girder fuel their already high inflation rates.

Quantitative easing has been judged a failure by a host of economists and strategists because it has caused interest rates to rise and asset prices to increase, but those are positive developments in my opinion. The price rise in assets (capital goods) is why big takeover deals are back. The impetus behind "merger mania" is simple: investors' expectations have changed drastically from last year's "double dip" mentality. Both market participants and corporations now believe that the return on investments over the coming years will be far higher than expected so assets are worth more now; thus the price increase. That's why investors are loving the increasing stream of takeovers and mergers. These asset price increases will lead to a surge in economic activity and ultimately increases in employment.

The rise in interest rates does not indicate inflation fears. They are simply reflecting the new reality that real returns on assets are increasing. In order to stay competitive, the bond market must offer higher rates. So don't be spooked by higher rates. Their increase is a natural, predictable and welcome development in any country's economic recovery. Don't let the talking heads tell you otherwise.

Expect the dollar to continue to weaken. Very few countries outside of the U.S. have any form of QE I, II. As a result, other countries' currencies will strengthen against the greenback as their interest rates rise much higher than our own. As I've written before, this is good for our exports because a cheaper dollar increases demand for "Made in America" products. Witness this week's take over of the New York Stock Exchange by the Germans.

As for the stock market, contrary to everyone's expectations of an impending correction, the averages continue to confound to the upside. I say expect a correction, but don't wait for it. We have considerable upside ahead of us. Stay the course and stay invested regardless of any pending pullbacks.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

@theMarket: 9 Percent Unemployment, Can 8 Percent Be Far Behind?

Sure, I'm jumping the gun a little, but I suspect in the weeks ahead economists will begin forecasting a percentage point drop in joblessness by the end of this year. Granted, that number is nothing to celebrate, but at least it is moving in the right direction.

For investors, however, that slow decline in unemployment does have a silver lining. You can count on the Federal Reserve to keep short-term rates at historic lows and keep QE II going until hiring accelerates. That means stock prices are going higher and Treasury bonds lower.

As I wrote last week, the conflict in Egypt is a sideshow, although it did get gold and silver off their proverbial backs. Dusting off my technical charts, I believe a bottom in gold at $1,300 a ounce or there about is reasonable. We almost hit that level ($1,318 a ounce) a week ago.

Silver also dropped to the $26.50 range and has risen every day since then. From the price action, it appears that the corrective phase of precious metals is just about over. Buyers take note that oftentimes, commodities will tend to re-test their lows; so if you are buying here save a little cash in the event these metals re-test.

Egypt has also caused oil to spike to my price target of $100/bbl.Six of the world’s ten most-used oil markers are now in triple digits. Crude oil futures for March delivery, the marker most often used in the U.S. media is still "only" $89-$90 a barrel so we still have a little room on the upside before I become cautious on oil in the short term.

Last quarter's earnings season is winding down and once again there were more beats than misses. The latest batch of economic numbers (if sustainable, and I think they are) indicates that the present quarter should see an acceleration in earnings overall. U.S. chain store sales jumped 4.2 percent in January, despite the horrendous weather. The auto manufacturers are generating such strong profits (a 17 percent rise in January) that suppliers, lenders and dealerships are beginning to feel new life in their own financial performance after a two year hiatus. That trickle-down effect should impact America's Main Street very soon.

On the global front, it's a similar picture with 15 of 24 of the world's major economies registering a surge in manufacturing. Factories throughout the U.S., Asia and Europe are experiencing growth, but it is also leading to higher commodity prices and therefore inflation. China and other developing countries have complained that U.S. policies (specifically the $600 billion QEII) are the root cause of these price increases. Federal Reserve Chairman Ben Bernanke denies that and instead blames any inflationary pressures on the runaway growth among emerging market economies.

Bottom line: every country in the world is playing the emerging market game, exporting their way back to prosperity. Those countries that have traditionally had that field to themselves suddenly find themselves in competition with the big boys. They can bluster, complain, even make veiled threats, but given the realities, they need us as much as we need them.

We had another big week in the markets as the averages rebounded from the Egypt scare, although all of the gains came on Monday and Tuesday. This year seems to be shaping up like the last, where most of each month's gains occurred on the first day or two of the month. In 2010, Mondays were especially kind to investors, but we will have to see if that trend persists again this year.

I'm bullish, although readers should expect pull backs at any time. Some of them may be quite hefty but that won't derail what I see as a continued upward bias in all the averages with industrials, commodities and technology leading the pack for now.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

@theMarket: Commodities and Emerging Markets

It has been a given that where commodities go, so go emerging markets; however, that correlation seems to have broken down over the last few months. While commodities, both precious and base, have continued to rise, emerging markets have underperformed since November. What gives?

For several years the basic investment thesis is that emerging markets are economic juggernauts with an insatiable demand for the world's natural resources. Their factories devour every form of commodity and transform them into the world’s textiles, steel, clothes, cars, toys, electronics and scores of other exports.

But sometimes you can come up against too much of a good thing. That is what is happening to several of the larger emerging market countries such as China, Brazil and India. All three countries managed to avoid global recession. While we languished with high unemployment and negative growth, most emerging markets continued to grow and grow and grow. As a result, their domestic economies are beginning to overheat.

As they do, their inflation rates are starting to rise to uncomfortable levels with serious consequences for their economic future. China, for example, grew 9.8 percent in the fourth quarter while registering a 4.6 percent inflation rate. This week, Brazil announced that consumer prices in there rose to nearly 6 percent.

The governments of these countries have responded by raising interest rates and tightening credit conditions. The Brazilian Central Bank hiked interest rates by one half percent to 11.25 percent on Thursday and observers expect another hike very soon.

Local investors, drunk on ever-higher stock prices in 2010, are decidedly miffed that their central banks are taking away the punch bowl this year. China's stock market has declined over 15 percent since November. Brazil and India have also underperformed the U.S. markets as well.

In the meantime, commodity prices have largely ignored this new reality until very recently. Brazil's sudden rate hike, in combination with China's higher reading on domestic inflation this week, have finally shaken some of the euphoria out of the commodity market. We need this pullback (and I hope it continues) in order to square prices with reality in the emerging markets

I believe the declines in emerging stock markets are coming to an end. I would be a buyer of those markets on further pullbacks, because I still believe that regardless of any further short-term actions to slow growth, their economies will still outgrow more developed markets this year, next year, and the years after that. Commodities are also a great place to invest once this pullback is over. I advise that you wait for some price stability before adding to positions.

As for the U.S. stock markets, it appears that just about everyone is now in the "too extended, probable sell-off" camp that we have been waiting for over the last few weeks. The contrarian in me doesn’t like to see the consensus come over to my point of view because the stock market often does what is most inconvenient to the greatest number of people.

Nonetheless, I would love to see a 3 to 5 percent correction before the end of the month. It would give me the opportunity to put more money to work. For specific recommendations, call or e-mail me.

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 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.