a blog about investing

Articles

Read A Few Dollars More articles

30 Minutes

Watch Bill Schmick’s TV series

The Financial Verse

Listen to the podcast with Yuki Cohen

Latest Posts

Rising interest rates spook markets

 

Over the last month the interest rate on a ten year, U.S. Treasury note has risen half a point.  That may not sound like much in a market that has seen nothing but declines in Treasury yields for years, but investors fear it is simply the start of something big. read more…

Retirement, who can afford it?

 

Most Americans’ retirement savings are under $25,000. That’s old news. The new news is that with social security in jeopardy, medical costs skyrocketing and the chances of living longer better than ever, how do you expect to retire in the years ahead? read more…

30 Minutes

The Financial Verse

All Posts

The Bottom is in

Well, we’ve made it through another pullback together. It seems clear to me that this week’s stock market action is telling us that the worst is over—for now.

Up, up and away

read more…

The End of QE II: Wax on, Wax off

Wax on, right hand. Wax off, left hand. Wax on, wax off. Breathe in through nose, out the mouth. Wax on, wax off. Don’t forget to breathe, very important”

Mr. Miyagi, The Karate Kid

Miles of newsprint and thousands of terabytes of internet space has been devoted to what happens tomorrow, the day after the end of the Federal Reserve Bank’s quantitative easing experiment. Some say it bodes ill for bond and stock prices. Others argue it will have little or no impact.  I say it is simply the end of one program and the beginning of another.

The total cost of the Fed’s Treasury bond purchase program amounted to $600 billion. The goal of QE II was to put more money in the hands of consumers and corporations (especially small businesses) in an effort to boost spending and hiring. Unfortunately, it did little to jump start the economy in either area.

In a circular exercise similar to Mr. Miyagi’s admonition to “wax on, wax off” the Fed purchased the bonds from the banks, hoping that they would in turn lend that sudden windfall of money to us. But instead, these banks just bought back more treasury bonds. The banks simply refused to lend that money and the Fed has no authority to make them.

QE II did result in lowering interest rates to historical lows however, which allowed financial speculators to borrow money cheaply and to invest that cash ( really short-term speculative trading) into commodities, stocks and all sorts of higher yielding securities. Those of us who have retirement savings also benefited somewhat as the stock market rose and we regained some of the losses incurred in 2008-2009.

All it meant for the average Joe was higher gas and food prices as commodities skyrocketed into the world’s latest financial bubble. That actually slowed spending. As for corporations, the big guys already had more cash on their books than they needed. Their profits were exploding as well and none of them felt the urge to hire more labor since they were doing just fine with what they have now. And why not, since their workers have had no wage increases in years, have had their benefits cut to the bone, and if they complained, well, there are always 13.9 million unemployed American who would be happy to take their job at an even lower pay rate. As for small business, QE II was a total bust for them.

Doomsayers, such as Bill Gross, the highly respected portfolio manager of the world’s largest bond house, Pimco, believes that without the Fed’s support, interest rates in the Treasury market will spike, the economy will fall back into recession, and the stock market will tank in response. A host of knowledgeable players subscribe to that theory and have made their views known to anyone who will listen.

Others believe that there are still plenty of potential investors, especially overseas, that will still want to own U.S. Treasury bonds as a safe haven and as a dependable source of income. Interest rates might rise a little, especially on long term bonds (10-20-30 years) but the rise would depend on the growth rate of the economy and inflation expectations. The stock market would no longer be underpinned by the easy money policy of QEII but that might actually be a good thing since it would reduce the amount of speculation that seems to be a massive part of today’s stock markets.

Of course, the caveat here is that Washington politicians come to their senses and do not allow the country to default by refusing to raise the debt ceiling.

In my opinion, I do not think that the Federal Reserve has taken us this far only to cast us adrift to the whims of fate. The Federal Reserve will continue to keep its role as the largest buyer of Treasuries. A week ago, for example, the Fed stated that it intends to use the proceeds of maturing debt that it already owns to buy more treasury bonds as needed. A total of $112.1 billion will mature within the next 12 months. The Fed also holds $914.4 billion of mortgage-backed debt and $118.4 billion of Fannie Mae and Freddie Mac bonds which will also mature. That will mean an additonal$10-$16 billion of cash maturing every month. When you add it all up, the Fed has another $300 billion in cash, more than enough to maintain its support of the bond market.

Remember too that the Fed isn’t about to give up on the economy just because QE II didn’t quite do the job that they intended. Like Daniel in The Karate Kid, the Fed has learned some valuable lessons from their latest experiment.

 I predict that they will try again, as early as next month, to come up with yet another way to stimulate the economy. I’m not sure what they have up their sleeves, but I expect we will start hearing rumors about a new plan very shortly. That will certainly play well in the stock market, don’t you think?

Better Days Ahead

After this week you should have either an upset stomach, stress headache or both. Human beings do not do well in markets that climb up and down by over a percent on a daily basis. Unfortunately, as this market bottoms, we may expect more of the same.

Looking up, not down

read more…

Oil, the new tax cut

Falling oil prices means more money in comsumer's pocketbook

On Thursday, for only the third time in its history, the International Energy Agency decided to release 60 million barrels of oil from global strategic petroleum reserves. They did so in order to “ensure a soft landing for the world economy.” read more…

Greece — how to default without defaulting

The European Community’s solution to the Greek debt crisis has been an exercise in kicking the can down the road for well over two years. Unfortunately, this Greek Tragedy is now taking on the dimensions of a three ring circus and taking the world’s financial markets along with it.

Will Greece step toward or away from bankruptcy?

read more…

Time is running out for the Presidential Cycle

Here we are in the middle of June, in the third year of a Presidential Cycle, and no one is talking of its historical bullish implications. Despite all the present gloom and doom about the economy and the stock market, here’s something to remember. There has never been a negative return in the stock market during the third year of any president’s four year term since 1939.

Will stocks follow the cycle this time?

read more…

Follow A Few Dollars More

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

@afewdollarsmore

Archives

Post Categories