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@theMarket: 'Play it again, Sam'
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| "Play it once, Sam, for old times' sake, play 'As Time Goes By.'" — Ilsa Lund (Ingrid Bergman) "You played it for her, you can play it for me ... If she can stand to listen to it, I can. Play it." — Rick Blaine (Humphrey Bogart) "Casablanca"
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Last year, the bull-market rally began to run out of steam on May 2. Over the next two months, the Dow fell 1,000 points to the 11,900 level. There was then a rally that took the averages back up to a little over 6 percent before giving up the ghost once more on July 26. It continued to decline until the beginning of October, falling all together about 20 percent.
It wasn't until the Federal Reserve Bank came to the rescue once again with a new round of monetary easing that the markets finally bottomed and began to rise on Oct. 4, 2011. Over the next six months, the S&P 500 Index rallied 30 percent until its peak this year on April 2. It waited until May 1 before beginning its present pullback.
For Wall Street traders, it was also an exhausting time in the markets during which swings of several percentage points a day became common. Much of the decline was blamed on Europe. The U.S. economic data didn't help either. Week after week, one disappointing data point followed another raising the specter of a double-dip recession. Does any of this sound familiar?
Today the circumstances in both Europe and the U.S. are eerily similar to what happened last spring. So far in May, the stock market is playing the same swan song as last year.
"History doesn't repeat itself, but it sure does rhyme," said Mark Twain well over a century ago. And that saying certainly applies to the stock market. The question is what, if anything, is different about this time around?
The short answer is, not much. Italy and Greece were the focal points of the Euro debt crisis last year. Since then there has been a massive bank bailout and an austerity pact but nothing much has been done to turn the European Unions' struggling economies around. The economic picture has actually deteriorated further, thanks to the nonsensical austerity plan engineered by Angel Merkel of Germany.
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Spain is the main problem right now. As their economy nose dives, their debt explodes, while their banks wobble under mountains of bad real estate loans; the 12th largest economy in the world is fast approaching a life-support situation. Greece, after last week’s election upset, is also revisiting its off-again, on-again membership in the EU.Once again, investors are keying off the Spanish/Greece/Italian sovereign debt yields to decide whether to buy or sell on a daily basis. So far it's been mostly selling. Remember my "She Said, He Said" columns of last summer? Investors were driven crazy by conflicting and often contradictory statements out of Europe's capitals. Today the names have changed — Hollande instead of Sarkozy in France, Draghi instead of Trichet at the ECB, and in Greece, Papandreou for someone yet to be announced — but the conflicting statements remain the same.
Over here, we have the same issues over the economy that we had last year. And in the wings, hovers the Fed. That's right, if our market, Europe's markets, the economy and employment begin to drop dramatically, the Fed will once again come to the rescue. That, my dear reader, is why this year is rhyming with last year and the year before that.
As long as governments continue to tinker with the world's stock markets, as they have done ever since the 2008 financial crisis, we will have these same issues over and over again. I have written about our stop and start economy often. As long as the Fed is the sole locomotive of growth, we can expect the economy and the stock markets to continue to boom and bust.
This has truly become the Great Recession. Readers of this column were advised at the end of March, beginning of April, to take profits and prepare for this sell-off. I am writing off this second quarter. By the end of it, I suspect the averages could be where they were at the beginning of the year, until then, stay defensive and I'll keep you posted.
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: Cyber Attacks: Who Is On The Frontline?
| John McClane (Bruce Willis): Hey, what's a fire sale? Matt Farrell (Justin Long): It's a three-step ... it's a three-step systematic attack on the entire national infrastructure. Okay, step one: take out all the transportation. Step two: the financial base and telecoms. Step three: You get rid of all the utilities. Gas, water, electric, nuclear. Pretty much anything that's run by computers which... which today is almost everything. So that's why they call it a fire sale, because everything must go." 'Live Free or Die Hard'
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There is a war being waged today in this country, one that could have severe repercussions for each and every one of us. It is costing us billions of dollars a year and yet neither business nor government wants to spend the money necessary to fight back.
This week on Capitol Hill lawmakers are getting down to debating the pros and cons of passing one of several versions of a cyber-security bill. Everyone hopes the eventual legislation will launch a counterattack on an army of highly sophisticated hackers bent on some serious mayhem. The debate boils down to who is going to pay for a defense system that will prevent the bad guys from accomplishing a "fire sale," a la the last "Die Hard" film.
The Obama administration backs a Senate bill sponsored by Sens. Joe Lieberman, I-Conn., and Susan Collins, R-Maine, that would implement new rigorous standards and require companies to notify the government when their networks have been breached. The business community opposes it as just more intrusion into the private sector that will mean more costly regulations on top of more regulation. Instead, they would prefer a bill promoted by Sen. John McCain, R-Ariz., which wants the government to issue alerts about imminent cyberattacks but would not require a company from acting on the information unless they thought it was a threat to their business.Unlike other wars the United States has fought, this one is on our territory and the frontline troops are increasingly the IT departments of American corporations. To date, those troops have been both outnumbered and outfought by the enemy. The rates of infiltration by organized gangs or state-sponsored hackers are escalating. In a multinational study by the Center for Strategic and International Studies, the three countries ranked as most vulnerable to attacks were the U.S., Russia and China, while the biggest potential source of attacks was our own country.
Today, we only hear of the biggest cyber-attacks such as the 2011 theft of over 200,000 customer names, account numbers and contact details from Citigroup or the 100 million accounts pilfered from Sony Online Entertainment's PlayStation Network. I was on the receiving end of the Citigroup theft, and believe me, it drives home the danger like nothing else.
These attacks are costing American companies big money. It costs on average over $7.2 million in costs (lost business, legal defense and compliance) or $214 per customer record in costs. If it is a first time breach, it can cost 30 percent more, not to mention the inconvenience to its customers like me. Yet, the real danger is not in the consumer sector. It is in the potential for a breach in the nation's infrastructure system.
As you read this, for example, our natural gas pipeline companies are currently battling a major cyber-attack from a single source, which was launched in December 2011. Don't dismiss this threat. As early as 1982, the CIA managed to blow up a Siberian gas pipeline by using what was called a "logic bomb" involving the insertion of a portion of code into a Russian computer system overseeing the pipeline.
Those involved in cyber security worry that our infrastructure companies (power, water, nuclear, etc.) do not realize how vulnerable their systems are to outside invasion. Computer systems and safeguards that were originally installed years ago are out-of-date. But managements are loathed to upgrade their systems simply on a bet that someday, maybe, their company might be targeted by hackers. It is a persuasive argument since to safeguard a company against all possible dangers — earthquakes, tornados, floods, nuclear fallout, to name a few — would be cost prohibitive.
On the other hand, no one wants another 9/11. Maintaining a head-in-the-sand attitude until something happens is just the kind of strategy that has organizations such as Homeland Security experiencing perpetual nightmares. It is a tough one but somewhere in the debate lurks a compromise. I just hope we can find it.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: A Sea of Red
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In April, the labor force participation rate, the employment-to-population ratio, and the number of people who said they are employed all fell in the month. The sad fact was that 350,000 people quit looking for jobs altogether. As a result, the labor force technically shrunk, which makes the overall unemployment rate look better than it actually was.
Investors ignored the fact that the number of jobs that were reported by the Bureau of Labor Statistics over the last three months was all revised upward. In total, during the last quarter 53,000 more jobs were gained but went unreported until now. But the market focused solely on this month's data and sold accordingly.
I think that responding to an individual data point is a mistake. Data like unemployment numbers, GDP and the like should be viewed over time. It is the trend that counts, not individual data reports, because government statistics by their nature are highly inaccurate and most of the time undergoes several revisions before a final figure is reported. Yet, the markets insist on trading off today's numbers as if they held the answer to the market's directions for days or weeks into the future.
The big drop in labor participation, however, is not a good sign for the economy or for the administration. In an election year, the GOP frontrunner, Mitt Romney, is asking voters if they are better off today than they were at the beginning of the Obama administration. Clearly those 350,000 workers who have abandoned the work force will answer with a resounding no.
And yet the total number of jobs has grown since President Obama came into office, so both sides will use the unemployment data to suit their own agendas. As the politicians blame each other for the failures and take credit for the successes, no one is really enunciating a clear and precise plan for how to increase the number of jobs in this country. It is simply a game of sound
Overseas, this weekend there are also elections in both France and Greece. It appears from the polls that Nicolai Sarkozy will lose the presidential election and French Socialist candidate Francois Hollande will take over the reins of power. This will present a problem to both Germany and the European Union since Hollande intends to renegotiate the recent austerity pact signed after much deliberation and market turmoil by EU members.
In Greece, parliamentary elections will be held in the midst of a deep recession caused by these same austerity measures. There is enormous unhappiness among Greek voters toward the European Union and its own leaders in both major political parties. Extreme and radical fringe party candidates have been gaining support. There is a chance that voters will not only reject both parties but elect new radical leaders that will want to either renegotiate all their past agreements with the EU or outright reject remaining agreements within the Eurozone altogether.
Given this background, it is not surprising that investors are selling first and waiting for the elections results later. Next week could offer investors a wild ride if things go the wrong way in Europe. Despite the sell-off this week in the markets, we are still a mere 33 points below the level of the S&P 500 Index at the beginning of April. We could easily fall further given the right circumstances. My advice is to stay defensive and remain on the sidelines until the landscape is a bit less muddy.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: 'Sell in May and Go Away?'
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Back in July 2008, I wrote in "Myths of the Market":
The most convenient thing for all of us would be to cash in our chips, get to the sidelines and enjoy our summer. If you had done so in 2010, you would have missed a meager 1 percent gain in the markets between April 30 and Oct. 31. In 2011, you would have dodged a 6.7 percent slump in the averages. But markets usually do what is most inconvenient for the greatest number of investors.
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 pullback 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 pullack in the fall was mild, followed by a strong gain into the end of the year.
The explanation for the differences in these presidential election-year markets comes down to uncertainty. That uncertainty is compounded when the economy has been weak, as it is now. Leadership in times like these is extremely important to market investors. Some would argue that the incumbent (the devil you know) is preferable to one you don't know, who may or may not, usher in successful policy changes. The presidential candidate's party affiliation did not appear to have any bearing on the results.
So the moral of this tale is that there may still be a sell-off between now and the end of June, but politics will have an inordinate influence on what happens this summer and fall.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Fly Me To The Moon
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"I don't get it," said a reader on Friday morning. He was sure that the markets would crater on the back of a disappointing Gross Domestic Product number for America's first quarter. The data indicated our economy slowed from last quarter's 3 percent growth rate to 2.2 percent.
"Not only was the U.S. market up, but so was the Spanish market. That doesn't make any sense. Will you help me out here?" he asked
It is true that S&P, the credit agency, downgraded Spanish sovereign debt Thursday night by two notches from A to BBB-plus. S&P believes that Spain’s budget deficit is going to worsen based on further declines in their economy. In a different era our reader would have been correct in anticipating a downdraft in Spain’s stock market, but not in this environment.
Investors took the initial decline in their stock market as another buying opportunity. By the time the U.S. opened on Friday the Spanish market was up by almost one percent. So what makes weak economic data, whether in the U.S. or Spain such an opportunity for investors?
Investors are conditioned to believe (after two and a half quantitative easings here at home and the on-going monetary stimulus in Europe) that the weaker the data becomes the higher the probability that the governments will step in and save us. Thus, the worse the news becomes, the better it is for the future of the stock market. There is plenty of precedent to believe that.
Just look back at what has happened every time our government-influenced stop and start economy began to slow over the past few years. The cycle began with the first stimulus package combined with central bank monetary stimulus (QE I). For a short time the stock markets skyrocketed, the economy grew and unemployment began to decline. But as QE 1 waned so did the economy, and with it the stock market.
The Fed waited and hoped the slowdown was simply a blip but in the end the negative data forced the Fed to launch another program (QE II). Once again the economy and the markets reacted by moving higher. But here we are again. The economy is slowing and investors are expecting the Fed to bring a new punch bowl to the party.
Will the Fed cooperate? Yes, at some point if necessary. QE III is not on the table quite yet and may never be if the economy can find legs of its own. But if the economy and unemployment begin to slow further then we can expect another save by the Fed. Of course, the devil is in the details. The key words to focus on are "if" and "further." Those words appear to represent one thing to the Fed and another to investors.
At this point, no one (including the Fed) really knows if the country is in a sustainable recovery. Investors who expect the Fed to launch QE III because the economy declined .80 basis points in one quarter are smoking something. In each of the prior cases of Fed easing the stock markets and the economy had to stall dramatically before the next round was launched.
You might recall that in each case we had to suffer an 18-23% stock market decline before the Fed stepped in to save us. If those same investors expect the Fed to ease with the stock markets approaching the year’s highs then once again, give me some of what you’re smoking.
Yet, in my opinion, that's what the markets are betting on. If we look back at the month to date, we could argue that the markets gave us the 5 percent correction we had been looking for and are now poised to move higher. A contrarian indicator like bearish market sentiment is rising. Dips are being purchased once again and momentum seems to be on the side of the bulls for now.
I'm thinking we could run another couple of percent here on the S&P 500 Index, at least to 1,420 or maybe as high as 1,450 over the next few days or weeks. If you are nimble, you might be able to take advantage of that move. If, on the other hand, in-and-out trading is not your style than just stay where you are and enjoy the fireworks.
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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
