Friday, December 24, 2010

Stop and Smell the Roses for a Change

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

First and foremost, if you celebrate Christmas, I hope you have a truly wonderful holiday! For me, it's hard not to love the period from Thanksgiving through New Year's with so many fun holidays and the chance to spend quality time with family and friends. If only someone could invent a way to not add 10 pounds, I would be even happier!

Writing a financial newsletter and contributing to this blog can sometimes seem like one negative topic after another. Very few people really want to worry about their money or their future. They just want it to take care of itself. So with that said, it's time to look at some of the positives.

As a country, we are saving more. That may not be so great for the economy in the short-term, but it’s very healthy for Americans to have a rainy day fund. The real key to financial security both as individuals and as a nation is to have money in the bank that can be spent when needed not just the minute it is acquired. Once you outlive your money, you don’t have many favorable options left. Individuals have gotten the message. Local and state governments are being forced to face the same reality. Next up, hopefully, is the federal government.

Necessity truly is the mother of innovation. Difficult times in the past have resulted in new innovations, new businesses, new realities. Recessions have historically brought about a surge in true entrepreneurship and I eagerly await what is being conceived, researched and created.

Our environment is vastly improved from 30-40 years ago. It's hard to remember sometimes how very polluted our lakes, streams, air and grounds were just 30 years ago. In the United States, we have made tremendous changes in how we treat our environment and in doing so have set standards others throughout the world are striving to achieve. These changes have led to better technologies, cleaner energy and awareness of how small actions, good and bad, add up.

We are living longer, more active lives. Eighty is not quite the new 60, but the potential is there. Advances in health care have been astonishing over the past few decades and that needs to continue ahead. Laparoscopic, arthroscopic, non-invasive surgery is but a small example of how far we have come. From days and weeks in the hospital recuperating to hours, we keep getting better.

Life is actually much less expensive than it was 10, 20, or 30 years ago. The price of a loaf of bread may be more, but a transcontinental phone call, plane ticket, computer, telephone and many technology related conveniences are incredibly cheap in retrospect. I still remember buying my first computer in college, the Apple II E for more than $1000. Computing power must be thousands, if not millions of times faster for the same price or less. The variety of clothing and household items that surround us today would have had our great-grandparents in awe.

Information is among the greatest riches of our lives today. The libraries and references of the world are open to anyone with a computer and Internet access. This is such a completely transforming reality that it is hard to grasp. Can you remember thumbing through the newspaper for products on sale? I remember spending hours in the library using the Dewey Decimal System doing research for a term paper, not to mention the encyclopedia Britannica at home. It’s almost beyond my grasp to think about life without the Internet.

Thanks to technology, many people have the freedom and flexibility to work in the environment they choose. Investing is an excellent example of that. Thirty years ago, managing assets required access to information and people available only in the money centers - the New Yorks, Chicagos and other major cities. Today, some of the best money managers are located in what would have once been considered the most unlikely locations. Moving away from the "herd" I believe leads to new and better ways of managing assets and the growth of active management approaches.

Market-wise, the vast majority of sentiment indicators I follow are and have been flashing warning signs for some time, yet the market just thumbed its nose and continued moving higher during this seasonally positive period.

It's extremely rare not to see any weakness between Thanksgiving and now. It may be unprecedented, but I would have to research that. Yes, selling from corporate insiders remains extreme. Yes, the various sentiment surveys are all frothy. Yes, option traders are uniformly bullish. Yes, volatility has shrunk to low levels. Yes, yes, yes. There are lots of very worrisome signs.

But price, still the most important arbiter, refuses to give in. Why is that? Interestingly, the Federal Reserve's Permanent Open Market Operations (POMO), which I wrote about in Bernanke Manipulating the Markets, has been a buyer in the treasury market almost every single market day this month.

You know the old adage, "Don't Fight the Fed". Well, Ben Bernanke and his quantitative easing (QE) has certainly been a boon to the stock market with not a single significant down day in December. Bears have been beaten, bloodied and left for dead! Worth noting but by no means predictive, the Fed will NOT be in the market buying on the 23rd, 27th, 30th and 31st. The countdown to 2011 could have a few fireworks left!

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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