Here is the link to my segment on Fox 61 in CT, Top 5 Tips for Financial Fitness in 2014
On Monday, I was in the city spending some time with my friends at Yahoo Finance. As always, I thank them for their hospitality and Jeff Macke for the engaging conversation.
With the volume and velocity of information out there, trying to get a read on the stock market is like attempting to get a sip of water from a firehose. Thankfully Paul Schatz of Heritage Capital has three ways to check the health of the market and durability of its trends. They don’t work every single time but Schatz says these are great “tells” as to whether or not what’s happening from day to day is reality or a mirage.
1. High Yield Bonds (HYG)
More commonly known as “junk bonds,” high yield corporate debt has been one of the favorite plays for investors who want decent cash flow with slightly more safety than stocks. Historically low rates on U.S. Government debt have made junk bonds an attractive way to play in between bonds and equity.
That’s why junk is the canary in the coal mine according to Schatz. Risk appetites should be relatively consistent across the board. In other words, if stocks are rising, corporate debt should be moving higher as well.
“If the market rallies and high yield does not participate that’s worry sign number one,” says Schatz.
2. S&P 400 Mid-Caps (^MID)
The S&P400 is a measure of stocks not quite big enough to make the cut for the S&P 500 (^GSPC). Companies this size tend to be hit harder by economic fluctuations than those with larger balance sheets or more lines of business. This makes the mid-caps a way to gauge the real health of the earnings environment for corporate America.
“Traditionally in bull markets mid-caps lead,” Schatz says. When the S&P 400 isn’t leading, or at least playing along with a market rally, it’s time to take profits.
3. Dow Jones Transportation Index (^DJT)
As would be expected, the Transports are a collection of 20 American companies in the business of moving things from point A to point B. Railroads, airlines, and trucking basically. Even in a virtual age most traders regard the Transports, or “Trannies” as a good gauge of underlying economic activity.
By market tradition, real bull markets only come when both the Dow Jones Industrial Average (^DJI) and the Transports are breaking out together. At the moment there’s little risk of either happening, but Schatz suggests traders stay on the lookout.
“If the Dow Jones Transports can take out the April highs I think it’s a straight 5 – 10% shot higher,” he says. Though he concedes it’s a “long way to Tipperary” before they do.
The latest Street$marts is out, “What would Thomas Jefferson Say to the Architects?” http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20120625.pdf
Topics in this issue include a little known, but important economic indicator, the latest pullback in stocks and where gold is headed.
The latest Street$marts has just been posted!
One story related by Peter L. Bernstein in “Against the Gods: the remarkable story of risk” was the experience of Kenneth Joseph Arrow, an American economist and joint winner of the 1972 Nobel Memorial Prize in Economics.
Some officers had been assigned the task of forecasting weather a month ahead, but Arrow and his statisticians found that their long-range forecasts were no better than numbers pulled out of a hat. The forecasters agreed and asked their superiors to be relieved of this duty. The reply was: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”1
Philip Tetlock, a psychologist at the University of California, Berkeley, has literally spent a lifetime looking at how well experts in their field do with respect to their professions. Over a period of 20 years he collected the predictions of 284 people who made their living “commenting or offering advice on political and economic trends,” including journalists, foreign policy specialists, economists and intelligence analysts. By the end of the study, Mr. Tetlock had quantified 82,361 predictions. How did the experts do? The vast majority of the predictions were worse than random chance. Post graduate degrees offered no advantage. Famous experts tended to do the worst.
Where did these individuals go wrong? According to Mr. Tetlock the main reason was overconfidence. Convinced that they were right, the experts ignored evidence suggesting they might be wrong. Another important bias is that most experts find it very difficult to make a negative prediction. Fear of “crying wolf” may be part of the reason, but there is also a desire to please the audience and be re-elected, or asked to speak again. Another important cognitive bias, Mr. Tetlock points out, is that most of us find it very difficult to change our minds.
Overconfidence and “confirmation bias,” where experts ignore evidence suggesting they are wrong, are of particular concern to investment advisers. With the financial security of our clients at risk, we can’t afford to become “prisoners of our preconceptions,” as Mr. Tetlock puts it. This is one reason why active management relies heavily on non-emotional, technical and quantitative analysis and mathematical relationships within the financial markets. Our goal is objectivity and discipline, checking our ego and emotions at the door. The most important information for an active manager is not where the market has been or where we believe it is going, but where it is today.
By setting very specific investment rules as to when an asset will be purchased or sold, or when it is safe to be invested in equities or bonds or a specific sector, or when a defensive posture is better, our goal is to avoid letting our biases and emotions influence our decisions. I may be right in my belief that the market will recover from its current malaise, but to base a client’s portfolio on that belief ignores the consequences of being wrong. What if I am right on the market’s direction but completely wrong on the duration of the problem?
Active management is risk management. As with all tools to limit risk, it can also result in lost opportunities if conditions change quickly. But without risk management, without basing investment decisions on where the market is today, the risk of a major drawdown impacting the client’s future increases.
1 Against the Gods, Peter J. Bernstein, page 203.
Here is the latest Street$marts with a detailed article on the bust that is Facebook.
Last Wednesday, I participated in an interesting discussion on CNBC’s Closing Bell regarding what I consider to be the most “unloved” investment. Most continue to scratch their heads as to why they haven’t cratered with the trillions of the dollars our Fed has created over the past few years. But there are bigger stories at play.
For years, most have thought that inflation would really kick into high gear, but that certainly hasn’t happened. You may have seen it at the pump or at the grocery store, but those are considered “transitional” and easily cured with higher prices. Think about it. The higher the price goes for a certain good, the more likely we are to cut back and/or find a substitute. I am a big chicken eater, but if the price of chicken doubled, tripled or quadrupled, guess what, I would find something else to eat like turkey.
That may be all well and good for chicken, but what about heating my house with oil? Aren’t I stuck? After crude oil skyrocketed to $147 in 2008, alternatives really started to sprout up. Americans dramatically cut back on miles driven and oil used at home. They also started purchasing wood burning and pellet stoves, solar panels and geo-thermal systems. In most cases, there are always ways!
Anyway, I digress. Since 2007, I have believed that our biggest enemy would be and is deflation, not inflation. During the credit crisis, trillions and trillions were “vaporized”. Remember all those alphabet soup products that banks were inundated with? CMOs, CLOs, CDOs, SIVs. The ones that were AA and AAA but really were junk? Think of all that money that went away! Although the Fed has created trillions, it hasn’t come close to replacing the money that was lost.
Wages are a component of inflation and wage growth has been essentially non existent. And the elephant in the room, housing? That’s the largest component of inflation and it would be very tough to argue that housing prices are and have been on the rise. So in my opinion, we are in need of a little, controllable inflation.
So I think I uncovered a good future topic. Enjoy the video.
Here is the article based on my interview with CNBC’s European Closing Bell from May 1.
The 2012 bull market still has further to run, according to Paul Schatz, president of Heritage Capital, an independent investment banking and advisory firm. Instead of a major selloff, Schatz believes that the equity markets will only peak later on in the year, or early in 2013. But he’s undecided about whether this will incorporate a “sell in May and go away” mantra.
Fuse | Getty Images
“We see two possible paths. One is that the major indices go right back to new 2012 highs in May and then race to all-time highs in the third quarter or early fourth quarter,” he told European Closing Bell. “The other scenario is that stocks use May to pull back and take out the April lows before bottoming and then heading to new 2012 highs in the third quarter.”
Schatz’s reasoning is that the huge amount of central bank liquidity in the system is only going to get bigger.
“The Fed remains, and there’s still a torrent of liquidity in the system,” he said. “The ECB is just warming up. They have printing presses for trillions and trillions of stimulus for the rest of the decade.”
Schatz also downplayed the effect of the euro zone debt crisis on the equity markets. “It’ll be hard-pressed to say that Spain being in a recession is going to end this bull market.”
Even though Schatz is bullish in equities, his company still has a sizeable position in U.S. Treasuries.
“The U.S. fiscal house may not be in good shape, but on a relative basis, it’s better than most of Europe and Japan and there remains a sizeable bid under the market from the Fed and foreign governments,” said Schatz.
In my bi-weekly interview with my friends from ET NOW in India, I continue to share my long-term view that Europe’s debt problems are not going away anytime soon. Although that may seem bad on the surface, markets have a way of discounting known and anticipated news into current prices.
Remember 2008? Who could forget it?!?!
The stock market turned down long before the economy and news. And right at THE bottom in March 2009, the news was about as bad as the modern investing generation has ever seen. For now, Europe’s problems are known and somewhat expected. Any market can pullback 4-8% at any time, but a complete global, systemic meltdown should not be in the cards here.
In a chat with ET Now, Paul Schatz, President, Heritage Capital LLC, talks about the factors affecting global markets and the Eurozone crisis. Excerpts:
ET Now: What do you want to start with, US economic data, Goldman Sachs earnings or the kind of indications we have got from Citigroup?
Paul Schatz: Going into the earnings season, analysts kept ratcheting down and ratcheting down expectations. So the bar was set so low coming into Q1 earnings, that you have to imagine most companies could exceed the bar pretty easily.
But as we have always learned in the market, it is not what the news is, it’s how the stocks and the companies in the market react to the news. So clearly after the bell today, after a great day for the bulls on Wall Street, Intel and IBM on a natural high.
ET Now: The Spanish bond yield fell and it has been a successful auction at that. Are concerns about what may happen to Spain now receded?
Paul Schatz: No, I think this is almost a daily soap opera. One day we are worried about yields going 6-7% higher, the next day the auction goes well. This news has been with us for more than a year and once we get by Spain, if we get by Spain, it will move to Italy or it will move to France, where we get the French elections.
So these kinds of European sovereign debt woes are going to be with us not just for days, weeks and months but we have got years to deal with this.
Here is the second video I did with the folks from Yahoo! at their beautiful new studio in the city. Anytime there are bold statements on gold, people come out of the woodwork to comment. And I would be surprised if they aren’t at least 100 comments by the time you read this.
One of the great myths is that gold goes up when there is inflation. I think the 1990s is the perfect example of why that isn’t true. A better statement would have been that gold goes up anticipating inflation…
If you bought gold nine months ago at a record high and have since seen the price decline by 15% or $300 an ounce, you’re not the unluckiest investor alive, you’re just a little early.
“This is not a pullback, this is a full fledged correction,” says Paul Schatz, President of Heritage Capital in the attached video. “We’re shaking out every weak-handed holder possible.”
His case for owning gold is three-fold but also comes with the self-disclaimer that he’s “not a gold bug” that reflexively sees the precious metal as the answer to all investment questions.
First off, there’s the fundamental backdrop that the world is full of accommodating central banks right now, least of which is our own Fed. As Schatz says, “the ECB (European Central Bank) is just getting started.”
Add in super low interest rates and just enough inflation and we find ourselves facing so-called ”negative real rates of returns” and you’ve got an environment where something like gold, that protects purchasing power, should do well.
There’s also a timing and technical component to Schatz’s bullish call on bullion. As much as he thinks it would be ”nice” to see gold bottom out around $1500, he’s counting on a sharp snap-back to the previous high of $1900, that will ultimately break through psychological resistance of $2000 by the end of this year or early 2013.
“Once we exceed the old highs in the $1900s, we certainly go to $2000 and that sets the stage for the next run” he says, pondering the next high-water mark, “Is it $2200? $2300?”
“I don’t think the secular bull market in gold is over,” Schatz concludes. “I think you have years left in it.”