Archives for November 2013

Happy Thanksgiving

At this time of Thanksgiving celebration  our thoughts turn gratefully to you with  appreciation.

   

May the good things of life be yours in abundance, not only at Thanksgiving but throughout the coming year

    
May peace & happiness always be with you, 
 
Paul Schatz
Heritage  Capital
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For each new morning with its Light
For rest & shelter of the night

For health & food, for love & friends,

for Everything Thy goodness sends
 Ralph Waldo Emerson

LIVE from the Floor of the NYSE

I am going to be on CNBC’s Closing Bell on Tuesday, November 26, at 3:45 PM est live from the floor of the New York Stock Exchange. The topic will likely be the Dow’s recent assault on 16K and where it goes from here til year-end. As you already know, risk has increased substantially since mid October, but that doesn’t usually pick the exact top.

Last week, I did a really enjoyable and informative interview on Fox Business discussing the impending taper from the Fed on their printing activities and what it means for the markets and economy. People are back to that “greedy” feeling and are not concerned. Remember, those who ignore history are doomed to repeat it. Our economy needs to get to the other side of the next recession before we get back to “normal” behavior. Tapering now will accelerate the move to recession and a bear market.

http://video.foxbusiness.com/v/2854343331001/financial-crisis-necessary-for-economic-recovery/

Fed Should NOT Taper!

Paul Schatz, president of Heritage Capital, typically lets it all hang out when expressing his views on markets, economics and sometimes even politics.

An active asset allocator and adviser with 25 years’ experience, Mr. Schatz is on board with the Federal Reserve‘s quantitative-easing policy and would even like to see it extended beyond early next year, when the Fed is expected to start tapering its $85 billion in monthly bond purchases.

InvestmentNews: Do you think it’s time for the Fed to start reducing the five-year QE program?

Mr. Schatz: From my perspective, the answer is no. If you believed in quantitative easing to begin with, you can’t stop now. The results of stopping now will be disastrous. The big problem is QE was created because rates were already at zero, so it is effectively a way to get negative rates. I don’t believe the economy can stand on its own right now without quantitative easing.

InvestmentNews: What do you want to see before you’ll support tapering of the QE program?

Mr. Schatz: Ever since 2008, my thought has been that this is a typical post-crisis recovery. You don’t cut back on QE until we get through the next recession. There’s always another recession coming, that’s the business cycle. If we had quit QE after the first round, we probably would have had another recession and then we probably would have been done with it, but it would have been painful.

InvestmentNews: What is the biggest challenge facing the U.S. economy?

Mr. Schatz: I don’t think there’s a single biggest challenge. We’re living through this typical post-recession recovery. Companies are beating on [the] bottom line, but not on [the] top line. But probably the biggest challenge is the employment markets, but they are functioning exactly as they should in a post-recession recovery. We are going according to the script, but people don’t have the patience to live through it.

InvestmentNews: Where do you see the greatest areas of opportunity?

Mr. Schatz: That’s the toughest part. You have a triple-digit gain in this bull market, but the bull market is old. I think we’re approaching crucial point toward either a melt-up followed by a correction of 50%, or we peak during the first quarter of next year and have a garden-variety pullback of 20% or 30%.

The opportunity is to be really, really mindful of the portfolio. Presumably, most people have made a lot of money in last five years. People are feeling really good and they’re into passive strategies. I think this is the most opportune time to employ active strategies in a portfolio. Right now, we’re in the danger zone where risk is increasing every day, and you need to lay some protection on the portfolio.

InvestmentNews: Do you think the botched Obamacare rollout will have any impact on the markets?

Mr. Schatz: I think it has zero impact. Except for making incredible media fodder, I don’t think the rollout or fixes is having any impact on markets right now. I do think it will have a permanent and detrimental impact on the economy longer-term.

Jeff Benjamin covers investment strategies in his award-winning column, Investment Insights, and also dives deep into the minds of leading portfolio managers in his regular column, Portfolio Manager Perspectives.

http://www.investmentnews.com/article/20131119/FREE/131119899?issuedate=20131119&sid=INTEL&utm_source=marketintel-20131119&utm_medium=in-newsletter&utm_campaign=investmentnews&utm_term=text#

Fox Business, Stocks, Bonds, Gold and Oil

I am going to be on Fox Business’ Markets Now at 1:05pm today (Wednesday) discussing the stock market’s recent assault on Dow 16,000, a target I gave several times here and in the media. Now that the market is there, what’s next?

I can tell you that from my perspective, risk has increased substantially, but by no means should the bull market be over. Stocks are overdue for at least a pullback (2-8%), but probably more on the downside next year, especially if they continue to run into year-end.

Both gold and the bond market are very close to their own lines in the sand. A closing move by gold under $1250 opens the door to all kinds of bearish scenarios that frankly, I did not think would come this year. Likewise, the treasury bond market also has a line or two in the sand, but it’s farther away. All year, I have forecasted a late year bond rally, but this one is on the verge of petering sooner than expected if the recent highs cannot be exceeded. The last thing the Bernanke and the Fed and the stock market want to see is the 10 year note yield more than 3%.

Finally, crude oil is trying to find a low above $90 here. If energy cannot stabilize soon, that will usher in more negative scenarios into the $80s.

 

More on Twitter

I have pretty much beaten the proverbial dead horse with my comments on Twitter, but as I look back, they were nowhere near as much as when Facebook went public.  Below is another TV interview where I look particularly good. I can say that because they interviewed me over the phone!

http://video.foxbusiness.com/v/2816611949001/twitter-hype-overblown/

Twitter, the stock, is in an interesting spot right here. It looks like it wants to rally in the short-term, but because the line in the sand is so close, the risk is easily defined and not too severe for the more aggressive trader.

Twitter & How to Play Hot IPOs

Last week, Twitter began trading in one of most highly anticipated IPOs in years, very similar to Facebook. You can view my very negative initial comments here. http://investfortomorrowblog.com/archives/826.

“Hot” IPOs like Twitter and Facebook are usually very emotional and as I have discussed over and over, emotion in investing can have a very detrimental impact on your portfolio! I went back and found similar IPOs to show you what transpired over the coming few months. The results should not be surprising.

Facebook had all kinds of problems right out of the gate and you are welcome to search the archives on the blog for my very opinionated view. As you can see, it was almost straight downhill for four months before THE bottom was hit.

fb

LinkedIN is next and similar to Facebook, there was immediate and significant weakness before a good low was seen.

lnkd

Just like with LinkedIN, Groupon experienced the ole buyer’s remorse right from the start with the first meaningful trough coming about a month later.

grpn

Yelp bucked the trend somewhat with only a shallow initial pullback, but the stock didn’t escape the carnage as you can over the first three months.

yelp

Zynga was just like the others with an immediate month long decline to a good trading low.

znga

Google is below and this is certainly not a social media company like the others. But at the time, it was an incredibly hot IPO. It was also during a very different investing climate back in 2005 with vastly different results. It does not belong in the group above, but I figured I would answer the question before it was asked.

goog

The moral of the story is that most times, investors are rewarded by having patience with hot IPOs. Personally, I would rather be late and pay up than be early and lose a lot of money.

Thank You

A very heartfelt THANK YOU to all of the brave men and women who have served our country and protected our freedom!

Big Day for the Stock Market… Twitter, ECB, GDP

The media and masses are all keenly focused on Twitter’s overblown IPO. Too bad you can’t trade it to the short side. Already, some knucklehead paid north of $50. Do people ever learn? While I do not think we will ever see the tech mania like the Dotcom bubble again in my lifetime, we are certainly seeing froth in the social media space and that’s not a good thing!

The real news of the day that is now only a footnote is the unexpected rate cut by the European Central Bank. Although, this is LONG overdue, the Europeans have been about jawboning and threatening the markets rather than action. With inflation in collapse and deflation creeping in, we are getting much closer to what I have spoken about since 2010, QE Europe. The ECB is trillions behind and better get their act together!

U.S. GDP growth came in much higher than expected for Q3, another piece of positive news this morning. So with Twitter, ECB and GDP, you would have expected another romp into new high territory. However, the bears look like they are finally making a meaningful stand. A lot can happen by 4pm, but at this point, it looks like stocks are in routine and healthy pullback mode of 2-6%.

Adding to the notion of some weakness are the recent sentiment surveys which show far too much bullishness among newsletter writers and the public.  With the employment report tomorrow morning and the poor showing this morning, a strong open on Friday could be a nice short-term selling opportunity.

As I discussed, http://www.investfortomorrow.com/newsletter/CurrentStreet$marts20131105.pdf and http://investfortomorrowblog.com/archives/789, I do not believe the bull market is over and we should still see higher highs after this pullback.

Canaries Still Singing

With many all time highs seen in October, it is a good time to review the canaries in the coal mine for signs of trouble. Remember, canaries are only valuable at major market peaks and bottoms. For the vast majority of the time in between, they will be of little value.

We review all of the major stock market indices and sectors along with other key indicators of overall market health. At major market turning points, we will often see glaring divergences or non confirmations with a few of the indices, sectors and indicators lagging the move. Let’s do a quick walk with the major indices and see if we have any warning signs.

The Dow is first and it just recently scored an all time high, which washed away the very small yellow light in October.

dow

The S&P 500 is next and it, too, recently hit an all time high. 

sp

 The S&P 400 Mid Cap is below and look how quickly it went from laggard (mid Sep to  mid Oct) to leader now where all time highs were made.

mdy

 Ditto with the Russell 2000 Small Cap, which has been the single market leader since mid October and throughout 2013.

russ

 The NASDAQ 100 is next and this index has frustrated me somewhat this year, especially in the middle of the year. Although it still needs to rally roughly 50% to eclipse its Dotcom bubble all time high from 2000, the index is sitting in new 52 week high territory and that indicates strength.

ndx

 Summarizing the indices, they are all in sync and show no sign that the bull market is ending.

The Dow transports are below and they are vitally important to confirm highs and lows with the Dow industrials. In the current case, the transports are and have been a market leader all year and that continues today as all time highs made.

tran

 The semiconductors are next and they are so important because they reside at the beginning of the technology food chain. The only caveat with them is that they are very volatile and can give more false warning signs that the others. As with the NASDAQ 100, they are far away from all time highs, 175% to be more precise, but they are currently seeing 52 week highs and their best levels since 2001.

semis

 The banks are below and are nowhere near the high they hit in 2007. That’s okay, but more recently, they have not exceeded the high they saw in June of this year. I consider this a mild warning sign.

bank

 The New York Stock Exchange Advance/Decline line is next, which measures the cumulative number of stocks going up and down each day. Until very recently, warning signs were given that the rally was becoming more and more selective. As you can see, the A/D line blasted through the previous all time highs and there is no longer a warning here.

NYAD

 Finally, the high yield bond sector is below using the PIMCO High Yield Fund as its proxy. I felt strongly that the peak seen in May of this year was THE high and that this was the first nail in the coffin for the bull market. Junk bonds have certainly surprised to the upside since the Fed did not taper in September and the run has been very strong, causing me to waver on whether the May peak could be slightly exceeded. In any case, this remains a warning sign, but not nearly as much as before.

PHYDX

Over the past few months, the market has breathed life into a few of the canaries on life support and the bull market remains alive and well. Because we do not have a preponderance of warnings, it will likely take at least a decline followed by a narrow rally to before we start seeing canaries die.