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It’s not 2008

This week the markets lost some ground. In the scheme of things, it wasn’t much, less than 3% on the S&P 500 Index. By the number of concerned calls I received, you would think we were back in the financial crisis. Investors need to chill out.

Let’s look at things with a longer perspective than just the first three weeks of January. In the fourth quarter of 2013, the S&P was up 12%. For the year, it was up almost 30% and the other averages did as well and some did better. A 10% decline after a runup like that would not be out of the ordinary. I have been expecting a pullback to at least the 50 day moving average, which is around 1,800 and possibly below that.

Readers, we need some sort of consolidation and selling is a perfectly normal and predictable event in the historical life of the stock market. The alternative would be a market that continues to go up, up and away until it was so extended it snapped like a rubber band. It would only end in disaster and a 20-30 % collapse in prices. You don’t want that and neither do I.

At the same time, over in the bond market, you may have noticed that interest rates have taken a breather on their march higher, while gold, which has experienced a 50% retracement over the last year, seems to be gaining ground. That is as it should be.

Nothing goes straight up or straight down. The Ten Year U.S. Treasury note in the space of less than eight months has seen its rate rise from 1.67% to a high of over 3%. It is presently hovering around 2.73%. It could easily trade in a range of 2.50% to 2.75% for several months as it consolidates.

Gold, on the other hand, has also had a very bad year and a bounce back of $200/ounce or more would be entirely normal. Make no mistake: both gold and bonds have entered a bear market that will last several years while the stock market, in my opinion, has entered a multi-year bull market. But nothing goes straight down or up.

I do recognize that many investors have had a hard time moving beyond the losses they sustained during the financial crisis and subsequent stock market meltdown. No one wants to see that happen again. Yet, I believe that was a once in a generation occurrence. It is over four years since those events occurred; the time has come to get beyond it.

If you are still so traumatized that every down draft in the market keeps you up at night reliving the past, then you should not be invested in stocks or bonds, commodities or anything but cash for that matter. Every investment holds risk (and reward). There is no such thing as a free ride where you can earn a good return on your money without risking some loss.

My bet is the market will likely bounce off these levels, if not a bit lower, make a lower high and then come down to a level below where we are today. It’s the cost of doing business in the stock market. Over the course of the next several months any losses will be made up, so I’m content to lick my wounds, take a few paper losses and allow the markets to go through this healthy consolidation period. You should do the same.

 

 

 

 

Income Inequality on a Global Scale

 

Income inequality has suddenly become a hot topic. Think tanks worldwide are releasing studies on the issue.  In this country, the President has made it a political issue in the mid-term elections. This week in Davos, the World Economic Forum will take up the gauntlet as well. It’s about time. read more…

A Cause to Pause

 

Markets usually need something to move them. Good news or bad, the markets want an excuse to go up or down. Now that the government, the debt ceiling, the budget and the Fed are temporarily out of the picture, investors are finally focusing on something meaningful—earnings. read more…

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Fiscal Cliff or Shallow Ditch?

 

“And you tell me
Over and over and over again, my friend
Ah, you don’t believe
We’re on the eve
of destruction.”

Barry Mcquire,”Eve of Destruction”
[ Lyrics from:

Panic has once again descended upon Wall Street. This time investors are gnashing their teeth over whether our political parties will be able to strike a tax and spending deal before January 1st. If not, so the story goes, we will plunge, like Lemmings, over the so-called Fiscal Cliff never to return. Why am I not impressed?

 We have had a number of these dramatic binary events over the last few years. They always make great theatre, but none have turned out nearly as bad as the media predicted. If you had panicked and sold on their advice you would be much poorer today.  This particular cliff-hanger reminds me of another end-of-the-year event that was predicted to cause horror and dismemberment among the world’s institutions, Y2K.

 The Year 2000 was a problem for both digital (computer-related) and non-digital documentation and data storage situations which resulted from the practice of abbreviating a four-digit year to two digits. Would the world’s computers be able to recognize and accommodate a year that began with “2” instead of “1”?

At the time, we were assaulted for months with stories that spelled out what could, would or should happen if the world was not prepared for this digital disaster. But predicting the end of the world is a zero-sum gain. If someone gets it right, (and no one has thus far) there won’t be anyone left around to brag about it. As for Y2K, it turned out to be, in the words of Shakespeare “Much Ado about Nothing.”

In this case, investors; who have known about the Fiscal Cliff for months, are assuming what happened before will happen again. Readers may recall that last year both Republicans and Democrats could not agree on how to address our growing deficit. The Republicans used the nation’s debt limit, which was fast approaching a ceiling, as a bargaining chip to force a series of spending cuts on the White House and Senate. Both sides refused to back down. At the eleventh hour it was agreed to kick the can down the road until after the elections by temporarily raising the debt ceiling in exchange for implementing a series of tax hikes and spending cuts that would be implemented automatically at the beginning of 2013.

If there is no compromise, pundits and even the President have predicted that the combination of tax rises and spending cuts will drive us back into a recession, the gains in employment will evaporate and the United States will quickly join Europe in vying for the worse economy of 2013. No one wins. Everyone loses.

What’s wrong with that picture?

Well, for starters, everyone knows it and politicians hate to lose. Americans have also conveniently forgotten that the parties did compromise last year. They agreed to disagree, but still raised the debt ceiling at the height of partisan politics. Today, less than two weeks after the elections, President Obama was re-elected with a mandate to lead but also to compromise. That seems clear when you look at the results in Congress. Republicans were re-elected and maintain their majority in the House while the Democrats control the Senate. It seems to me that voters want compromise from all their elected officials and both parties know it. Last year there was no such message; in fact, if anything, both sides felt it was their way or the highway and still they compromised.

So far, both sides have said they are willing to do just that. In politics (as in real life) you go into negotiations with your strongest suite. Otherwise, you have nothing to give in exchange for another card.  I believe there is a new willingness in Washington to compromise but, for Americans, it will have to be one of those “show me” moments. As such, patience and a cool head are required until then. 

We only have 14 or 15 working days on Capitol Hill in order to get a deal done before this “Eve of Destruction.” Just about everyone assumes both sides will not budge and negotiations have not even started.

In the meantime, there is an old saying on Wall Stree: “Don’t fight the tape.” It means that regardless of whether the direction of the market is right or wrong, don’t fight the flow. Right now, panic prevails, the markets are in a waterfall decline and investors are all going down like lemmings together. Don’t get caught up in this crowd psychology. In my opinion, sentiment and the markets will reverse as soon as it becomes apparent that this black chasm in front of us is simply one more shallow ditch.

 

 

 

Insult to Injury

 

It has been over a week since Hurricane Sandy descended upon the Northeast. Adding insult to injury, this week’s Nor’easter  provided yet another punch to a region that is barely standing.  Fortunately, yesterday’s storm was more of an inconvenience than a disaster. read more…

Uncertainty Lifts, the Fiscal Cliff Looms

After a year of uncertainty, we now know who will be governing the nation over the next four years. Unfortunately, it is not the guy that Wall Street was hoping would win. Investors took out their disappointment by selling. That is a mistake. read more…

Decision Time

 

Election Day approaches. Investors are jumpy as if the fate of the markets depends on which candidate is elected. Here’s my take—it doesn’t matter who wins. The markets are going up after the elections, no matter who wins. read more…

Income Inequality: the Trend is Not Your Friend

 

If left unchecked, the trend in income inequality in this country will continue to widen. It will lead to an increasingly dysfunctional economy, heightened political polarization, paralyses and a level of anger and mistrust that this nation has not seen since the Great Depression. read more…

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About Bill

Bill Schmick was born in a blue-collar neighborhood of Philadelphia, just a few blocks north of “Rocky Balboa” territory where most of his Catholic schoolmates grew up to be either cops or criminals. He narrowly escaped both professions by volunteering to fight in Vietnam as a U.S. Marine... Read More

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