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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.
The Independent Investor: Bad News Is Good News
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Over the past year the financial problems of Europe have been well publicized. Starting with Greece, most of the southern tier of European Union countries have been mired in recession, high debt and declining exports. Those problems have infected the entire continent, resulting in an EU-wide recession, but that is old news.
Over in Asia the story is the same. China, the economic engine of that region, has also experienced slowing growth, reducing the prospects for all its neighbors in the process. And now these problems are coming home to roost here in the United States.
Factory orders in the U.S. declined in June for the first time since 2009. The nation's manufacturing output has been one of the drivers of our own recovery but weakening demand from overseas, coupled with declining currencies in our export markets have resulted in a slowdown in U.S. output and exports.
It is not just manufacturing, overall economic numbers coming out of most sectors of our economy have shown a gradual slowdown. Investors are not only taking this bad news in stride but are actually bidding up the stock market because of it.
Readers only have to look back over the last few years to see the same kind of phenomena occurring over and over again. It usually occurs during the summer months and has a decidedly positive impact on the stock market. The answer lies in the continued government interventions in the private sector economy we have seen since the financial crisis.
Investors are now conditioned to expect governments to intercede when economies begin to slow down. There was a time in our country (as well as overseas) when periods of economic growth, interrupted by recession, was the normal give and take of free-market economies, but no more.
Today the private and public sectors are intimately joined at the hip. The Federal Reserve here at home and central banks abroad have made it their responsibility to keep their countries' economies afloat with every means at their disposal. After several such interventions, stock market investors are conditioned to view bad news as good news when it comes to the economy.
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.
Market participants fully expect the Fed will save them once again this summer. The economy only needs to slow enough to threaten a recession, investors believe, before the Fed will take action. Like crack addicts, we have all become addicted to these moves by the Fed. Unfortunately, their efforts, while probably keeping the economy out of recession, have done little to grow the economy.
What it has done is shift the seat of financial power to Washington and makes irrelevant the traditional tools for analyzing companies and markets. And along the way it has transformed the stock market into one of those roller-coaster rides usually seen only in amusement parks.
@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.
The Independent Investor: What's Libor To You?
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The London Interbank Offered Rate (commonly known as Libor) is supposed to be the collective best guesses of 18 of the world's largest global banks. They determine the interest that borrowers should be charged on any given day for short-term loans. Libor is set daily in London by the British Bankers Association (BBA), which eliminates the highest and lowest rates supplied by the member banks and then calculates an average from the remainder.
Since Libor is a benchmark rate, other loans are calculated on the basis of that rate. Most of the multitrillion dollar derivatives markets, for example, are based on Libor as are various commercial mortgages, commercial loans and consumer loans, including adjustable rate mortgages.
Some time ago I made readers aware that there was an ongoing, global investigation into the setting of interest rates by regulators in the U.S., Europe and Asia. This global governmental task force has been examining the complex trades throughout the financial capitals of the world for more than a five-year period.
This week the U.K. Financial Services Authority, the U.S. Department of Justice and the U.S. Commodity Futures Trading Commission levied a $451 million fine on one of Britain's most prestigious banks for falsifying interbank rate submissions to the BBA. These alleged deliberate bogus submissions were intended to help the bank's derivative department traders make illegal profits over an extended period of time. Regulators stressed that this was only the first of several findings that will involve some of the biggest banks overseas and in our country as well.
Some may wonder if justice is truly served by fining one bank $451 million. Although it is a lot of money, is it anywhere close to the true cost of this alleged manipulation of trillions of dollars in loans benchmarked to this all important rate? It is my understanding that many of the same characters that were responsible for the global financial crisis are also involved in this scandal.
If so, how many times will these financial thugs escape justice by simply shelling out our money to avoid the consequences of their actions? Let's face it, in the end; these fines are being paid by taxpayer money. It is the world's governments, through the central banks, that have been pumping billions into these banks' coffers. These same banks have used the money to speculate in derivatives and other markets. Now we are told they were rigging the markets as well in order to make even more profits. So, do they really care that they are fined a billion or two of those profits if they get caught in a scandal like this?
Hell no! If these allegations prove true, and the authorities haul in more of the same perps that brought us the financial crisis and its on-going consequences, I, for one, expect criminal charges be brought against these banksters and their henchman. We should all demand nothing less.
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.
