Thursday, January 13, 2011

Q4 in Review

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

As I reviewed Q4 of 2010, I was shocked to find how many folks had a sudden case of selective amnesia. It’s an affliction that affects people in the investment, usually two years after a bear market.

I think we all know and remember how tough 2008 was. Emotionally, financially, economically, systemically, politically. The very core of capitalism was being threatened, not to mention the very real risk of a modern day depression. Money managers all over the world saw their worst weeks, months, quarters and years of their entire career. The "deer in the headlights" syndrome fell over a good part of the industry.

What I find so "interesting", just three years later, is how many people either predicted the whole financial crisis and bear market or actually had an up year for clients. I cannot remember the last person who told me they got crushed in 2008. All I hear now is "well I knew it was coming" or "we finished in the black". You knew what was coming? You finished in the black what? Hole?

It's really incredible. I don't know if it's revisionist history or selective amnesia, but it sure sounds like a lot of bull to me! While our business really grew in 2008, and none of our programs lost what the market did, I don't think I want to live through a repeat of that scenario any time soon. There was nothing fun about it.

Turning to the highlights of Q4… Lacking during the final three months of 2010 was the theme of non U.S. geopolitical news. On that front, it was nice and quiet! North Korea may have rattled their saber, but that seemed more like a child craving attention than a nation on the verge of war.

The major headline news was two-fold and occurred during the same week in November. First we had the all important mid-term Congressional and Gubernatorial elections where the Republicans achieved an historic victory, more than reversing the tide from 2008. As I've written about before, I believe this will have positive implications for the markets and economy in 2011 by preventing the largest tax increase in history as well as temporarily cutting the payroll tax by two percentage points.

Not to be overshadowed, Bernanke & Co. formally announced the worst kept secret on Wall Street, another round of quantitative easing or QE2 to the tune of another $600B through June 2011. By QE2, the Fed has been buying the Treasury Bonds sold by the Treasury in hopes of keeping interest rates down.

Interestingly, the unintended benefit of QE2 has been the very positive correlation between the Fed's buying and the stock market rising. Almost every single day in December was up for stocks without even a single down day of 0.50%. That is historically remarkable! Given how poorly QE1 ($1.2T) supported the markets, it's astonishing on the surface that QE2 has been a risk investors' home run.

On closer examination, QE1 was attempted while the markets were in a clear downtrend, actually free fall. The government was trying to catch a falling knife. Bernanke & Co. must have learned their lesson as QE2 was initiated during a solid uptrend with much better results so far. Additionally, just like with interest rate cuts, it does take time to have all that money filter through the system. While Q4 was void of bad news, and I certainly hope that continues, the odds don’t favor another long stretch without some shoe falling somewhere.

FYI, I will be on CNBC's Worldwide Exchange on January 20 at 5:35am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

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