Friday, May 27, 2011

Inflation? I spit in your face!

(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 dive into today’s controversial topic, I want to say goodbye to one of the true pioneers in business television, Mark Haines from CNBC’s Squawk on the Street who passed away suddenly this week at the far too young age of 65.

From his FNN days in LA to the CNBC merger to the host of Squawk Box to creating all of the popularly used on air nicknames to his final spot hosting from 9am to 11am, Mark Haines was the consummate professional. 

Never shy or intimidated by a guest, Mark would not hesitate to challenge your view and force you to defend your position.  With his unique eating habits and flair for the dramatic, Mark Haines was one of the faces of the network.  You can Google some of his more interesting moments, like cutting his tie in half, donning an Army helmet during the Dotcom collapse and calling for a stock market bottom in March 2009. 

When I started marketing to the media to build my profile in the mid 1990s, one of my long-term goals was to be interviewed as the stock market opened by Mark Haines.  Thankfully, I achieved that goal several years ago and have enjoyed every interview with Mark ever since, especially the one where he challenged my view about using different analysis in deflationary times than inflationary times. 

I never met Mark Haines in person, but he is someone who has been part of my business life for decades and will be sorely missed.  May he rest in peace…

And now to the topic at hand.  With so much attention paid to commodity inflation lately, I thought a good item to discuss inflation in general. 

Longtime readers have known that since 2007, I have been in the deflation camp, not believing for a minute that serious, structural and systemic inflation was anywhere in our immediate future.  And I still share that view today.  Comparing this period to that of the 1970s, or Argentina, Zimbabwe or the Weimar Republic is just plain absurd in my opinion.

YES, we have commodity inflation.  I agree!  But I side with Ben Bernanke that it is more transitory than structural.  Real inflationary problems usually have certain DNA markers, such as money velocity in the financial system.  Essentially, that means banks take in money and create many, many more dollars from that single dollar.  Today, we still see record amount of cash held at the Fed on behalf of the banks.  Add to that, more than $1T on corporate balance sheets and you can easily conclude that companies are in no rush to deploy their capital.  In other words, a dollar is worth more tomorrow than it is today.  That’s the opposite of inflation where a buck is worth more today than tomorrow!

Other systemic items include capacity utilization.  While those numbers have climbed from almost depressionary levels below 70, they are nowhere near the 85%+ that would be worrisome as you can see from the St. Louis Fed graph below. 

Look out of your window at the housing and job market.  With housing stable at best and the average person’s largest asset, you would be hard pressed to offer that there is even the slightest of inflation here.  And the employment picture, while much better than in the heat of the crisis, continues to show more than 9% of the workforce unemployed, 10% if you trust the Gallup poll below. 

But digging a little deeper, the “real” unemployment rate, taking into account the underemployed and discouraged (U6) is almost 20%, according to Gallup.  I am not sure anyone can use this data to support the inflation argument.

Turning to one of the most important measures of systemic inflation, wages and wage growth, you can see below further evidence that supports my thesis that structural inflation is not a problem.  Think about what happens when everyone makes more money than last year and the year before.  Most people spend it!  More dollars chasing the same number of goods and services.  So prices rise.  When wages fall or stay flat, like they have most of the past 11 years, you have fewer or the same dollars chasing the same number of goods and services.  Prices stay flat or fall.

Remember, inflation is measured by price changes on year over year basis.  If oil goes up 100% in 2011 and remains at that same level in 2012, inflation is actually 0% in 2012 even though prices are high.  It’s the year over year change that signals inflation.

In the end, while it is painful at the pump and at the grocery store, I do not believe that consumer commodity inflation is here to stay and will be a long-term, systemic problem.

FYI, I will be on CNBC’s Squawk on the Street at 9:35am on May 31.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

Follow us on Facebook at and on Twitter  @Paul_Schatz

Thursday, May 26, 2011

New Haven woman sentenced to 30 months for bank robbery

NEW HAVEN - David Fein, U.S. States Attorney for the District of Connecticut, announced today that Marta Lozada, 43, of New Haven, was sentenced today by U.S.District Judge Janet C. Hall in Bridgeport to 30 months in prison, followed by three years of supervised release, for bank robbery.

Hall also ordered Lozada to reside in a halfway house during the first 6 months of her term of supervised release.

According to court documents and statements made in court, on February 4, 2010, Lozada robbed a Bank of America branch at 100 Amity Road. She took $4,858, records show.

Friday, May 20, 2011

Silver at the Fork in the Road

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

In the past few issues of my Street$marts letter and on Facebook and Twitter, silver has been a popular topic.

 If you are not following my daily comments and would like to, please click on the Facebook and/or Twitter icons at the bottom of this post.  When we left silver not long ago, I showed a series of charts on how bubbles are built and what they look like. 

I also explained why they are so difficult to profit from, using Keynes' line that the market can stay irrational longer than you can stay solvent.

From the 2008 bottom.  $9 to $50. What do you think? Bubble?
Today, we can easily see below that silver was decimated from $50 to $33 in a little more than a week.  Has the bull market ended?  Is silver headed back to single digits?  It's still too early to tell, but the bull market has been seriously wounded.

It was certainly a back breaker for the bulls as the Chicago Merc, where silver trades, repeatedly raised margin requirements to help put a damper on rampant speculation. And contrary to popular belief, there is no anecdotal evidence that raising margin requirements on commodities causes prices to decline.  Volume certainly slows and perhaps volatility recedes, but price is like water. It finds its own level. 
Conspiracy theorists are out in full force, believing that this is all part of a grand scheme by the government to confiscate gold and silver holdings of American citizens like FDR did in 1934. If that's even remotely true, why wasn't the margin requirement on gold raised as well? What a far cry from a few weeks ago when that same group (or not) continued reporting that JP Morgan was short the equivalent of all the silver on earth and they were being squeezed to deliver the metal. You can't have it both ways!
As a student of market history, it's helpful to be able to compare current action with that of a similar period in the past. The next chart is from 2006 and shows a similar collapse in silver after a meteoric rise.
At that time, I remember believing that the gig was up and silver was toast for a long while. How wrong I was as the metal digested for more than a year before blowing off to the upside in early 2008.

I think the best way to ascertain where silver is now is to see how it behaves in the coming weeks. After a 34% hit, buyers should support the metal between here and $30. If we begin to see stability and digestion, I will argue that the bull market is not over. However, if we see more selling, especially into rallies that result in lower lows, I think the bull market will be dead as you can see the two possible paths below. The red arrows indicate that a new bear market began and the greens ones indicate a multi month digestion before taking off to the upside again above $50. 

 FYI, I will be on CNBC’s Squawk on the Street at 9:35am on May 31.
Feel free to email me with any questions or comments at

Until next time…
Paul Schatz
Heritage Capital LLC
Follow us on Facebook at and on Twitter @Paul_Schatz

Friday, May 13, 2011

Storm Clouds on the Horizon

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

Below is a familiar chart of the S&P 500 showing the various 4-8% pullbacks we continue to see. As I write this, the stock market is rolling over to the downside and it certainly has the feel of wanting to sell off more in the coming days. 

Rallies are getting shorter and choppier. If we do see more weakness, my initial take can be seen in blue and calls for a move below last week's low before resuming the rally.

Until proven otherwise, I believe this is just another 4-8% cleanse before moving higher. HOWEVER, as I have written about before here and included in my 2011 Forecast, I do not believe 2011 ends up hugely in the black. I think we "borrowed" some of that upside last year. 

My concerns now are growing, given that this entire bull market has been surfing a tidal wave of liquidity and the Fed is firm that the torrent will be turned off on June 30. Do I hear QE3?!?! I have serious questions whether the economy and markets can stand on their own two feet without major help (government assistance). 

I hope and pray Bernanke heeds the lesson learned in 1937 after the Dow rallied 400% from the 1932 low and all was sanguine in the economy and markets.  Back then, the government pulled fiscal stimuli, taxes were increased and interest rates were raised. Most people forget that the Great Depression Part II began with a surge in unemployment and a collapsing stock market. Only a shift to a wartime economy after Pearl Harbor did the U.S. begin the real recovery.

Last spring, as you can see below, we saw what happened when the Fed stopped pumping money into the system. Of course, Greece and the Flash Crash had something to do with it!

IF the stock market is in the process of building a peak this quarter, I think volatility will continue to increase through the end of June. We should see fewer and fewer stocks in healthy shape and more than a few key market sectors not behave well during rallies. I would also imagine that junk bonds and/or small caps would start to underperform, given how sensitive they are to liquidity.  In turn, that would set the stage for some unpleasantness (10-20% correction) during the third quarter.

Arguing against this theme is the fact that this is the third year of Obama's term, the strongest of the four year cycle where we have only seen one down year in the past 70-ish years. But as I mentioned already, I think the market borrowed some of the rally last year, which should have been a poor year according to the presidential cycle. 

In short, I am not ready to jump ship just yet. We are dancing close to the door, but I think there should still be some more upside after this little pullback exhausts itself in the coming week or two.

FYI, I will be on CNBC’s Worldwide Exchange from 5:30am to 5:50am on May 17.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC

Follow us on Facebook at and on Twitter at Paul_Schatz

Tuesday, May 10, 2011

Pew researchers: Interest rates stabilizing 2 years after CARD Act

Contrary to predictions, credit card holders are seeing stabilized interest rates, the elimination of over-the-limit penalty charges, a reduction in late fees charged by banks and minimal changes in annual fees since the landmark Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 took effect, according to new research by the Pew Health Group’s Safe Credit Cards Project.

Pew data show that the median advertised interest rates for purchases on bank credit cards remained unchanged from 2010. Meanwhile, bank cash advance and penalty rates held firm. Additionally, the percentage of cards with annual fees held steady for credit unions at 14% and increased for banks from 14% in 2010 to 21% in 2011. The amount charged for annual fees remained unchanged.

"Pew’s research shows that predictions that the legislation would spark new charges and long-term interest rate growth have not materialized," said Nick Bourke, director of Pew’s Safe Credit Cards Project.

"Whatever increases in advertised interest rates we saw going into 2010 have not continued into 2011. The act created a new equilibrium where interest rates have flattened, penalty charges have declined and a number of practices deemed 'unfair or deceptive' have disappeared. Consumers are enjoying safer, more transparently priced credit cards - and banks and credit unions are able to compete on a more level playing field," he said.

The study, "A New Equilibrium: After Passage of Landmark Credit Card Reform, Interest Rates and Fees Have Stabilized," is the latest in a series of reports from the Pew Safe Credit Cards Project that has examined all consumer credit cards offered online by the nation’s 12 largest bank and 12 largest credit union issuers.

Together, these institutions control more than 90% of the nation’s outstanding credit card debt.

One caveat the study doesn’t address, however, is that most credit cards now carry variable rates, so if the prime rate starts to rise, that would lead to consumers paying higher rates on their cards.

Here are the key findings:

Interest rates have stabilized.
Median advertised interest rates for purchases on bank-issued credit cards held steady at 12.99 to 20.99%. Likewise, bank cash advance and penalty interest rates remained unchanged from 2010 to 2011. During that same period, median credit union purchase rates slightly increased and cash advance rates declined.

Penalties cost less.
Since the enactment of the legislation, over-the-limit penalty fees have all but vanished. Only 11% of bank credit cards now include them, while the largest credit unions have eliminated them entirely. Pew’s research finds that late fees continue to be widespread. However, the cost of fees has gone down now that the law limits first-time late fees to $25 in most cases.

Annual fees have changed little.
Last year, roughly 14% of both bank and credit union cards carried annual fees; in 2011, that number held steady for credit union-issued cards and rose to 21% for bank-issued cards. The amount charged for annual fees held stable at a median of $59 for banks and $25 for credit unions. Forty percent of cards with annual fees included no-fee promotions for the first year.

"The Credit Card Act is an excellent example of how bipartisan legislation can be enacted that both protects consumers from potentially harmful practices while simultaneously creating a marketplace where banks and credit unions are able to compete based on clear and predictable pricing," said Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group. "Congress should take a similar approach to make other financial products, such as checking accounts and short-term, small-dollar loans, safer and more transparent."

The Pew Health Group is the health and consumer-product safety arm of The Pew Charitable Trusts, a nonprofit, public policy research organization.

Friday, May 6, 2011

Bonds May Not Be The “Safe” Investment You Think

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

Many investors consider bonds the "safe" investment.  But in considering a bond "safe" you may be failing to manage some very real risks that bond investing presents. These risks are why bonds, like equities, require ongoing oversight and active management.

For starters, there is a difference between a bond fund and a bond.
An individual bond is a promise to pay ongoing interest over the life of the bond and your principal at maturity.
You have three risks with an individual bond. The first is the risk of default. The second is the risk that you will need your principal prior to maturity and be forced to sell a bond at a loss. The third risk is that when your bond matures, you will be unable to replace it with another bond paying comparable interest.

The value of a bond over its lifetime is directly related to (1) the perceived risk of default and (2) current interest rates. If you purchase a bond during a period when 6% interest rates are the norm, and interest rates subsequently fall, your bond could be worth more than its face value. If interest rates were to go up, the value of your bond, if sold prior to maturity, would fall because an investor could purchase other bonds offering higher returns.

A bond fund is a collection of bonds with differing maturities and interest rates. The manager buys and sells bonds with the goal of increasing the value of the fund. The investor receives diversification across multiple bond issues, professional selection of bonds with an eye toward reducing the risk of default, and laddering of bonds of different maturities and returns typically with the goal of creating a stable flow of income (but no guarantee).

Unless the bond fund is a Unit Investment Trust (UIT,) it has no maturity and thus no obligation to return your principal. If a bond fund falls in value, there is no option of simply holding it until maturity to recapture your principal. The value of your investment in a bond fund will change in response market conditions and interest rates. On the other hand, you gain liquidity through the ability to sell virtually all bond funds at the current fund value (NAV).

The problem with bond funds, and with bonds you might want to sell before maturity, is the future direction of interest rates. The chart below shows the change in interest rates over the last 10 years. With every drop in rate, the value of a good bond increases if sold today. It's a good ride and one you want to stay on as long as it lasts.
The catch is that we don't know how long interest rates will remain at their current lows. The Federal Reserve has indicated that it sees no need for increases in the Fed Funds rate in the near future. The economy still struggles to recover and low rates are a good thing for the greatest debtor in our country - the U.S. Government. What we do know is that when rates begin to rise, they will affect the value of a bond portfolio. That's when risk management needs to be a part of the portfolio.
Feel free to email me with any questions or comments at
Until next time…
Paul Schatz

Heritage Capital LLC
Follow us on Facebook at and on Twitter @Paul_Schatz 

Monday, May 2, 2011

A Chinese Proverb on time and money

Thought I'd share a Chinese proverb with you from my collection of favorites:

With money you can buy a clock, but not time.

Enjoy and please pass it on...


Treasurys up slightly after bin Laden's death

NEW YORK (AP) — Treasury prices inched up Monday as investors weighed the news of Osama bin Laden’s death.

The price of the 10-year Treasury note rose 9.37 cents per $100 invested in late trading. Its yield, which moves in the opposite direction, fell to 3.28 percent from 3.29 percent late Friday.

Traders initially sold off government bonds after President Barack Obama said that bin Laden, the al-Qaida chief behind the Sept. 11, 2001 attacks, had been killed by U.S. forces in Pakistan. But investors eventually returned to the market on the belief that the threat of terrorism had not changed materially.

Traders also shrugged off a report that showed manufacturing activity grew for the 21st straight month in April.

In other trading, the price of the 30-year Treasury bond rose 31.2 cents per $100 invested, while its yield fell to 4.38 percent from 4.40 percent late Friday. The yield on the two-year note was unchanged at 0.61 percent.

In the market for short-term Treasury bills, the three-month T-bill paid a 0.03 percent yield. Its discount was 0.04 percent.

Commodities Review:

FALLING GRAINS: Corn prices fell 3 percent on expectations that planting will pick up this week in parts of the western Corn Belt because of drier weather. Wheat and soybeans also fell.

BIN LADEN IMPACT: With the exception of gold and oil, commodities not affected much by concerns about possible extremist retaliation after U.S. forces killed Osama bin Laden Sunday in Pakistan. Gold settled slightly higher while oil fell slightly.

DOLLAR’S EFFECT: Many commodities benefited from a weaker dollar. Since commodities are priced in dollars, a weaker dollar makes them more of a bargain for buyers using other currencies.