Friday, September 17, 2010

Washington Needs a Wake-up Call

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

So far so good on the preferred path for the stock market. I’ve written many times since early July about higher and much higher prices coming and now, the major indices are sitting right at their June and August high levels. While I am very happy to see that (beats a stick in the eye), as stocks go higher and higher, so does risk. Once we see another 1% on the upside, I believe volatility is going increase along with the chance for a downside reversal within 3-5%. If you’ve benefited from the rally, now is not the time to get complacent and party like its 1999. Dancing close to the door is a good strategy now and will be even more warranted at higher levels.

I am keenly watching the behavior of high yield (junk) bonds along with the number of stocks advancing and declining daily and which sectors are leading the market higher or not participating. This should give at least some warning of a change coming, but it’s far from guaranteed.

The big political/market news lately was something I discussed during the summer; the potential for the democrats to throw a Hail Mary in hopes of saving the mid-term elections in November, although with the Tea Party doing so well this week, that’s got to have dems celebrating!

Barack Obama did not disappoint. From my seat on the positive side, the administration is seeking to allow businesses to write off all new plant and equipment investments in 2011, rather than amortizing over many years. The end result is a potential positive shock to jobs to create the goods as well as potentially more jobs from the company making the investment.

This is one area I've written about and discussed in the media for years; the need to offer tax incentives and credits and help business help themselves without bailouts and handouts. Hopefully, this is a sea change for the administration and more programs like this will follow,

On the negative side, long time readers already know my skepticism (to put it politely) regarding government stimulus. It's a slippery slope that once begun, there's no turning back. During the first quarter of 2009, Congress and the administration passed a record $787B spending bill without the means to pay for it that was sold as a modern day New Deal, heavy on new jobs and infrastructure. It's far from a stretch to say that it's been a bust with only a small percent of "shovel ready" projects funded and underway.

Now we are being a sold another infrastructure bill of goods that emphasizes jump starting the jobs market with "only" $50B to start and at least another $50B over the next five years. Do we need monies allocated for our aging and almost decrepit infrastructure? OF COURSE, we do! And we need monies for job training and education improvements and disease research and technological upgrades and renewable energy, etc. But targeting big energy by "closing loopholes" because the ground is fertile against them isn't the answer.

Where does it end? Does the government just keep creating spending bill after spending bill and hoping they work? Hope certainly isn't a viable investment strategy and it's no better a fiscal one either! As George W. Bush so eloquently mumbled in 2002, ""There's an old saying in Tennessee - I know it's in Texas, probably in Tennessee - that says, fool me once, shame on - shame on you. Fool me - you can't get fooled again."

Regarding taxes, I am pleased that both parties have embraced making the Bush tax cuts permanent for the middle class. That makes perfect sense in any economy, but especially one in as poor shape as ours. The problem I’ve had all along is that raising taxes on any constituency is bad enough in good times (but sometimes necessary and palatable), but is simply disastrous in bad economic times.

According to Wilbur Ross, fully 40% of all discretionary spending in the U.S. is from families making $250,000 a year or more. Raising taxes is only going to curtail and hamper what little growth is currently occurring. To further rub salt in the wound, the Obama administration is also floating the idea of adding more taxes on top of the already largest tax increase in history. While I am not a believer in high taxes and big government, it’s more tolerable in “normal” years without trillion plus dollar deficits. Raising taxes will not work to cut the deficit!

I’ve noticed a very interesting paradigm shift in this country since I began my career in 1988 when the entrepreneurial spirit was so high. It used to be that we all strived to become successful, and revered and idolized people who made it on their own with creativity, perseverance and good ole American ingenuity. It seems like successful Americans are now demonized and targeted, as somehow they are to blame for our woes and should be punished. That’s not good for our long-term health and survival as a world power. We are all in this together!

I will be on CNBC’s The Call today (September 17) between 11:05am and 11:15am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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