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The Independent Investor: 2012 Could Be Another Up & Down Year
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This year a lot can happen. So much depends on forces outside our control that predicting the markets will be up (or down) X percent by year end would be criminal at best. Instead, I would like to broadly outline the possibilities and risks we face in the months ahead and how best to play them.
As I predicted, we are currently in a rally that began before Christmas and should extend for the next few weeks if not months. I don't think we will hit any new highs during this period or if we do it won't be until April. Europe will most likely continue to dominate the news, so we should continue to experience quite a bit of volatility. Be prepared for the 1-3 percent up days followed by the same or more on the down days.
I believe that ultimately Europe will get its house in order but between here and there the markets will be quite choppy. A foot in both the equity and bond markets should play best in that environment. Stick with dividend and large cap stocks and defensive sectors in this period along with corporate and high yield bonds and short-term paper.
Although the U.S. economy continues to improve, it is nothing to write home about. Without additional help from the do-nothings in Washington or an end-run by the president around Congress, unemployment will remain high and growth between 1.5-2.5 percent. That is an optimistic scenario, which assumes that a European recession is inevitable but at the same time contained to their side of the ocean.
If, on the other hand, it appears that Europe's recession is spreading globally then all bets are off. Remember too that stock markets sell first and collect the facts later in this day and age. Just a hint that something like that is in the cards would be enough for a major sell-off in world markets. Therefore it wouldn't surprise me if we have a classic "sell in May (or April) and go away" scenario this year.
Granted that would be a worse-case scenario but one we must all be prepared for. Further hiccups in Europe, fear of renewed recession here at home without further monetary or fiscal stimulus from the Fed or White House could spook sending the S&P 500 Index back towards its 2011 lows at 1,100. Granted, that would be a worse case scenario but one we must all be prepared for. A switch to all bonds would be best in that case.
But remember, we are also in an election year and markets usually begin to anticipate that in the second half of the year. This could give investors an opportunity once again to buy the dip. If history is any guide, the Obama administration will want to do anything and everything they can to boost the economy going into the November election. This year that argument should carry additional weight since both parties are campaigning on the economy and unemployment.
In that case, we could see a major move higher in the averages off the bottom this summer that could move the U.S. market to substantial gains by the end of the year and into 2014. Now, wouldn't that be nice?
If some or most of my forecasts come true for this year, it is quite obvious that a buy and hold strategy will be a recipe for disaster as will all cash, all bonds or all stocks. There will be times during the year investors will want to be both aggressive and defensive and it will be a lot of work, just like last year. There is an old saying that "if you can't stand the heat, get out of the kitchen" or in this case, hire a money manager that can make those decisions for you, but be sure you pick the right one.
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: Resistance
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"I always sell my equity positions whenever the S&P 500 Index trades below the 200 Day," says a trader friend of mine, "and I don't buy back until it rises above that level again and stays there for more than a week."
It is a rule of thumb that has worked for market timers (those who try to sell the rips and buy the dips) more times than not since 2007, but it is not foolproof. There have been times in the past when stocks fell below that level only to rebound and continue much higher. Nevertheless, many traders take the 200 DMA very seriously. As a result you should too.
Every index has a 200 DMA whether you are looking at stocks, bonds or commodities. Most investors focus on the S&P 500 as their key average when trying to read the tea leaves in the stock market. Today, the 200 DMA is trading roughly at the same level that marks a gain or a loss for the S&P for 2011. The S&P Index started the year at 1,257.64.
The 200 DMA is right now about 1,259 (although it will change since it is a moving average). Several times over the last few months bulls have attempted to break that line, but the resistance has been fierce. Each time the bears have thrown back the bulls' advance decisively. So here we are again at the resistance line, but the Santa Claus rally has been fairly weak and prices have advanced on low volume.
Clearly, there is little we can read from the closing values of the S&P Index for the year. Given the enormous volatility investors have experienced, a gain or loss of 3-4 points and a close above or slightly under the 200 DMA is meaningless. It gives no guidelines for what will happen next.
On the bright side, the U.S. has done much better than other global markets. The main markets in Europe have suffered their worst losses since 2008, thanks to the continuing financial crisis. In Asia, the once-hot Chinese market dropped 21 percent for the year while Japan had its lowest close since 1982.
Their performance reflected a year that was plagued with natural disasters from earthquakes to floods, the Arab spring, trading scandals, wild rides in commodity, the complete dissolution of political leadership on both sides of the Atlantic and a continual widening between the "haves" and "have nots" around the world.
Bond prices, especially in our U.S. Treasury markets, were one area of positive gains. Prices continued to rise, despite the downgrading of our sovereign debt. Investors, spooked by the gyrations in the stock markets, flocked to this perceived safe haven. However, thanks to the low rates of interest, yields in that market have in some cases turned negative, such as Treasury Inflation Indexed bonds (called TIPs).
Today, a 30-year Treasury bond is yielding 2.9 percent while the Consumer Price Index, the nation's inflation gauge, has been running at a rate above 3 percent. At those rates, retirees who need income to simply stay afloat are not even breaking even with inflation.
I find it impressive that, despite the gut-wrenching turmoil, the U.S. stock market has held its own and is finishing even-to-up in the case of the S&P 500 and the Dow. It appears most of the bad news of 2011 has been discounted. Who knows, we may actually break that resistance and climb above the 200 DMA on the S&P 500. That may turn out to be my "famous last words" but I remain somewhat optimistic.
Despite the unknowns, I sincerely wish all of you the same joy and happiness you have given me this year. Happy New 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 email him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Robin Hood Would Be Proud
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Some call it the "Robin Hood Tax" (part of HR 3313) because it supposedly taxes the rich and distributes the proceeds to the rest of us peons. It is a bit more complicated than that, but you get the idea. Some say the proposal surfaced as a result of the Occupy Wall Street movement. Others credit the late Noble prize-winning economist James Tobin for the idea. The basic thrust is to impose a financial speculation tax of .03 percent or $3 in taxes for each $10,000 in financial transactions.
Although it doesn't sound like much of a tax, its proponents claim it could generate as much as $48 billion or more per year if all G-20 countries signed on to implement the tax.
In Europe, where every nation is scrambling to raise money, the idea is supported by the European Commission in Brussels that would like to see as much as $10 per $10,000 tax in place throughout Europe by 2014. The Italians, under their new Prime Minister Mario Monti, is planning to impose the tax as part of his country's fiscal reform plan. Both the French and German leaders are on record as backing the idea and even Pope Benedict XVI came out in support of it.
In the United States, the idea has found surprising support among some strange bedfellows. Bill Gates, George Soros, Ralph Nader, Al Gore, the nurses union and the AFL-CIO among others. As such, a bill to impose a tax on certain trading transactions in financial markets (part of H.R. 3313) is working its way through Congress. All the sponsors of the bill are democrats.
Republicans oppose it, which should come as no surprise since the vast majority of Republicans won't even read a proposal to raise taxes of any sort. Surprisingly, the White House and Britain's Prime Minister David Cameron are less than enthusiastic about it. Both feel it might jeopardize their country's leadership positions within financial markets where such a tax may drive traders elsewhere to do their business. The White House also believes it would hurt pension funds and the banks.
In my opinion those are lame arguments and don't square with the facts. For instance, both Hong Kong and Singapore, two fast-growing financial markets, already charge a $20 per $10,000 transaction tax. Great Britain, the leading financial center in Europe, has had a stamp tax in force for 25 years called the Stamp Duty Reserve Tax on most paperless trades of companies located or registered in the UK. It has not impacted the financial status of those markets one whit.
The Securities Industry is against it (surprise, surprise) warning that such a tax would impede efficiency, depth and liquidity in the markets as well as raise costs to issuers, pensions and investors.
What the tax will do, in my opinion, is reduce the speculation in global markets while generating much-needed revenues. Speculation, in the form of High Frequency Trading (HFT) is the bane of our existence. These traders buy and sell blocks of stocks, bonds and exchange traded funds second by second, minute by minute in large volumes throughout the day generating thin but profitable trades that add up. They could care less about a company's earnings or its future prospects. When a stock drops, hundreds, if not thousands, of HFTs and day traders jump on the trade, like vultures over a wounded animal, they drive their victim to its knees before going on to their next prey, all in the name of profit.
A $3, $5 or even $10 tax on these transactions will crater that market and do much to reduce global volatility. Who knows, actual investing may come back into vogue and with it the retail investor. Sure, the tax may hurt the little guy but the individual investor usually doesn't trade 10 or 15 times a day at $10,000 a crack.
Detractors argue that it is not HFT but the circumstances of the market, such as the European crisis, that is responsible for the volatility. I agree that the problems we face worldwide do create volatility and always have, but the markets have never reacted with the level of violent swings and almost daily market volatility that we experience today.
So I say string your bows, Oh, ye Merry Men, let arrows fly and support this transaction tax.
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: Ho, Ho, Ho
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In a recent radio interview, the host complained that the bad news just keeps on coming. If it isn't Europe, it's the embarrassment of our own political leaders in Washington. If that wasn't enough, we have tensions in Iran, North Korea and Syria. Yes, I agreed, all of the above is true and yet the stock markets are essentially unchanged from where they were a year ago.
Reading and listening to the chatter that at this time of year is largely focused on what's next for investors, I find a great deal of confusion. Most strategists are caught up in the continuing gloom and doom pessimism that has pervaded the markets throughout the year. This is despite the fact that the U.S. economy is growing at a rate higher than anyone expected.
No matter where you look — technical charts, momentum, fundamentals — it appears we are heading lower in 2012. Conventional wisdom has it that Europe is heading for a steep recession, China a hard landing and the U.S. by default is dragged down with them. In which case, the stock markets go lower.
After more than a year of faulty starts and disappointments by European leaders, most investors discount any new initiatives coming out of the EU as too little, too late. The joke that we call leadership in Washington is also well known. And that's my issue with the bear case. Everyone knows how bad it is — investors, the Fed, politicians, even Main Street. When a crisis is as well known as this one, it is usually addressed.
In my opinion, it is a mistake to get sucked into this malaise. The Europeans are making progress in solving their financial crisis. Granted, we may not like their half-measures, their delays, their posturing and constant policy reversals but in the end things are getting done.
Bond yields in Spain and Italy are coming down. Banks are no longer in danger of going belly-up. The central banks of the world are on record that they will not let the EU or the Euro fail. Just this week the European Central Bank loaned $640 billion in low-interest rate loans to their banking industry. There will be more of the same in the weeks and months ahead. It may not be enough to save Europe from a recession but it could well limit the severity and subsequent damage to the U.S. and the rest of the world.
Pessimism abounds wherever you look and that, my dear reader, should make you sit up and take notice. It is times like this when we have our best rallies. It is times like this that the smart money stays put and does not give in to the overwhelming gloom that is assaulting us at every turn. As a self-confessed contrarian, I remain somewhat bullish on the markets, if not hysterically so.
My strategy is to watch and wait between now and the end of the first quarter. December and January are normally the strongest months of the year. If the Santa Claus rally fails, followed by a down first quarter of 2012, then I will throw in the towel and get much more defensive. Until then I will give the markets the benefit of the doubt even if I keep my enthusiasm on a short leash.
Merry Christmas to all and to all a good holiday weekend.
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: Give Local
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American charities took in over $300 billion last year and hope to make this year even better. After all, we Americans are a giving people. Nearly two-thirds of us give something to charity every year with many of those donations occurring between Thanksgiving and New Year's.
Why we give is still somewhat of a mystery. The economy is nothing to write home about, unemployment is high and most of us are pinching pennies. Yet, we somehow find that spare dollar or two to drop into the charitable pot or, in some places, the hands of the homeless.
Experts point to the fundamental social urge to help our fellow human beings. There is also the "feel good" factor, since giving makes us feel better about ourselves. There is also the social pressure to give during company fund drives, or marketing calls for example. Yet, each year we discover that things are not quite as they should be in the nonprofit world. Most readers are aware that many large charitable organizations use professional fund raisers at some point or another for phone solicitations, direct mailing, call centers, etc. These fundraisers charge a fee for their efforts, which can be enormous delivering as little as 46 cents on every dollar donated to the charity.
Recently, the attorney general for New York State released a report that found that, on average, just 37.6 cents of New Yorker donations actually went to the charity of their choice. In some places, such as the Hudson Valley, charities received even less, just 17.4 cents/dollar, which was the lowest percentage in the state. There were actually 61 cases where the charity lost money after paying telemarketers and other fund raisers. New York is no different than Massachusetts, Connecticut, Vermont, New Hampshire or most other states in this regard.
Various organizations have given donors tips on the dos and don'ts of giving. Suggestions such as resisting pressure from telemarketers to give on the spot. Others urge you to do background checks on charities before giving or use charity rating organizations that will do that job for you. Experts say that when giving on-line read the fine print and every watchdog organization advises that we should all educate ourselves about charitable giving. All of the above advice is laudable, but where's the fun in that?
You see, most studies on philanthropy indicate that charitable giving is an impulse thing. That's right, we pass through the supermarket doors and toss our spare change into the bucket without thinking, receiving a heart-felt "Thank you and Merry Christmas" for our efforts. In fact, numerous studies reveal that the more one thinks about things like which charity is the best choice or how this or that charity uses my money, the less generous one tends to be. So how does one give without spoiling the fun?
Give local just like you buy local. Most of us know the needs of our own communities. There are dozens of charities right outside your door that you can give to directly without worrying about fraud or how much of every dollar they will receive. Food banks, animal shelters, human shelters, it's all there and when you give locally there is an added benefit. You improve the quality of life in your neighborhood, which helps everyone.
Take my company, for example. We gave away hundreds of turkeys last year at Thanksgiving. Individually, this holiday season, some of us are sponsoring needy kids with holiday presents as well as donating money to a local animal shelter. Surely there must be a soup kitchen, children's home or something that tugs your heart strings some where close. You don't even need to donate money when you give locally. The donation of your time can be just as valuable. So get out there and give. And God bless us everyone.
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.
