Friday, June 25, 2010

Let's not forget the dead

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Before I get into the meat of this posting, I want to share a few brief stock market comments.

As you know from prior posts, like Summer Rally Trying to Begin, which came out right at the low (better to be lucky than good!), I have been generally positive on the intermediate-term prospects for stocks into the summer. And while I still have that lean, our investment models quickly raised cautionary flags last week, leading me to do a lot of head scratching.

After 22 years in the business, I’ve learned that it’s much better to miss part of a rally than lose money and remain exposed. So we heeded our models’ warnings and significantly raised cash in excess of 50% around Dow 10,400 and S&P 1116. The market certainly does not have the “feel” of imminent collapse and frankly, I don’t think we will see much more than a routine 3-6% pullback from the highs before we launch another leg higher next month. Nonetheless, I have to temper my overall enthusiasm temporarily as we wait for the dust to settle.

As a side note, as I write this on Wednesday, the Federal Reserve is scheduled to release their announcement that rates will remain at essentially zero for the foreseeable future as the economy tries to get off the mat and stabilize. But I doubt Bernanke & Co. will say much more and certainly nothing very positive.

Since the bull market began, almost every Fed day has been a positive one. If today is not, that is a definite negative change in market character. Additionally, because of the recent heavy selling, the stock market is “supposed” to bounce into the weekend. If that doesn’t happen, it will be another indication that we are seeing a change.

This week’s contribution doesn’t really have an investment theme, per se, but it’s such a hot topic that I can’t ignore. I've been uncharacteristically quiet about the BP disaster for too long, waiting for some positive turn to occur. It's enough waiting. First, as I am sure everyone agrees, this is the worst environmental catastrophe in history. It's so bad that no one even knows how bad it is. First it was 5,000 barrels a day spewing out. Then 10,000. And 50,000. Now it’s 100,000 or possibly higher. But as oil continues to spew and the endless daily reminder on television along with the count of what day it is in the crisis, it seems to be almost totally forgotten that 11 hardworking Americans perished in the Deepwater Horizon explosion.

It's a horrible, awful thing that such widespread destruction is being done to wildlife, our shores and local industry, but let's not forget that 11 men are dead after going to work like many of us do on a regular basis, through no fault of their own. Presumably, 11 wives no longer have husbands and 11 families no longer have a dad. As bad and as terrible as the spill is, there is also a hefty loss of human life.

In their race to report, the media regularly throws out statements as facts, even though they have no basis. It's beyond irresponsible, but what are the consequences? None! In my channel surfing of Sunday morning political shows last weekend, one US News & World Report columnist stated that the two relief wells being drilled right now as a fix were far from a sure thing and "a game of inches", implying that an inch or two in either direction would doom the project. According to almost every expert I've heard and read, that's simply not true.

The reporter's statement was alarming and unnerving to viewers. On a separate topic during the McLaughlin Group, a known left leaning journalist had no problem labeling California republican gubernatorial candidate, and former EBay CEO Meg Whitman, as a social conservative, something that could not be farther from the truth. Immediately, the journalist was taken to task and forced to rescind her remark.

In the 24/7, speed of light, news flow, it seems that many in the media have taken the path of speak now and worry about the truth later. And we, the public, just continue to accept it. Getting back to the BP calamity, first, President Obama was praised for staying out of it to let BP deal with their man-made disaster. But then, he was harshly criticized for not doing enough or anything. At the same time, according to Gallup, his approval rating sank to a new low of 44%.

How similar is this to George W. Bush's handling of Katrina? Were they both slower to respond? Sure, but there's a fine line between adequate response time and the government playing a dominant role in every single crisis. Under Bush, FEMA was lambasted for not getting on top of the crisis the day after the hurricane blew out. With Obama, MMS is now one of the scapegoats that approved BP's drilling plan.

Whether it's a natural or man-made disaster, the government is almost always set up to fail with the exception of maybe 9-11. Do you respond too soon and risk making a potential mountain out of molehill? Or are you too late and come across as lax and out of touch?

Far be it for me to defend Barack Obama. Lord knows, I disagree with almost every single fiscal and economic policy and proposal he's made. But give the guy a break. We're in unchartered waters here. Pardon the pun. Should booms have been shipped down from Maine? Of course. Should we have allowed our European allies to send ships to help and suspend the Jones Act? In hindsight, you bet! But frankly, no leader EVER gets it 100% right. It’s just not possible and we are crazy to hold them to that standard.

I do think Obama did himself a disservice by making that speech last week from the Oval Office. I listened with the assumption I would not like the plans I heard. But instead, I came away much like left leaning MSNBC and right leaning FOX. There was no "meat" in the speech. No "how to". Just a lot of nothing really.

I watched the Congressional grilling of BP CEO Tony Hayward the other day, by both parties, and couldn't help but chuckle when they asked inane, rhetorical questions about the incident. They acted as if BP knew for sure what they were doing would cause such a disaster and did it anyway, to the point of almost bankrupting the company.

Does that mean we can grill Congress for forcing Fannie Mae and Freddie Mac to loosen lending standards over the past 25 years? Can we take Congress to task for predatory lending? Or allowing five investment banks to lever up 40 to 1? Or getting private deals from unscrupulous lenders like Countrywide?

One New York Congressman fired at Tony Hayward, "You're really insulting our intelligence"! Don't you need to first have intelligence before it can be insulted???

On a final note as I mentioned during a CNBC interview the other day, I was trying to figure out if there were any winners in the whole BP disaster. The only one that came to mind in a very perverse way was Goldman Sachs. Before BP, Goldman and Lloyd Blankfein were front and center, caught right in the crosshairs of Congress, Barack Obama and the general public. Since early May, you haven’t heard or seen much of anything in the media as Goldman and the SEC seem to be privately working on a settlement agreement. It really is amazing how quickly we turn or are turned from one hot topic to another…

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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