Wal-Mart… THE Answer?

(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 a very quick follow up to the last two week’s contributions, Financial Regulation...What It Means to You and America and Financial Regulation Follow Up… Good News!, the good folks at Casey Research pointed out some hidden trap doors that those sneaky and questionable Congressmen threw in.

“Under the new financial regulatory law, the SEC is now exempt from Freedom of Information Act (FOIA) requests. So if the SEC screws up, like it did in the Madoff case and countless others, and you file a FOIA request to find out what went wrong, the SEC is under no obligation to comply.

President Obama claimed that this new financial reform bill he signed into law the other day would increase transparency. But at least one provision will do just the opposite of what the president claimed.”

Additionally, “starting on January 1, 2012, all companies will have to file a 1099 for every transaction that exceeds $600, which would create a reporting nightmare for thousands of companies and absolutely crush small businesses.”

Finally, somehow Congress even surprised me by adding language requiring Wall Street firms to hire women and minorities, as if somehow that would prevent another crisis? Put that in the column of government run amuck. Maybe we should add that provision and amend the constitution?!?! How on earth does that belong in Financial Regulation? And I would guarantee you that most of those voting “yes” had no clue it was included. Well done, Chris Dodd and Barney Frank. You’ve stooped to a new low!

Sorry for the digression…

The following email has made its way around the Internet. Thanks to Richard Mooney for sharing again. I think we can all agree that Wal-Mart is far from perfect, but it's hard to argue that they are very smart and shrewd business people. Although they clearly have hurt mom and pop businesses all over the country, they really transformed our economy in so many ways.

Here's the email text:

1. Americans spend $36,000,000 at Wal-Mart Every hour of every day.


2. This works out to $20,928 profit every minute!

3. Wal-Mart will sell more from January 1 to St. Patrick's Day (March 17th) than Target sells all year.

4. Wal-Mart is bigger than Home Depot + Kroger + Target +Sears + Costco + K-Mart combined.

5. Wal-Mart employs 1.6 million people, is the world's largest private employer.

6. Wal-Mart is the largest company in the history of the world.

7. Wal-Mart now sells more food than Kroger and Safeway combined, and keep in mind they did this in only fifteen years.

8. During this same period, 31 big supermarket chains sought bankruptcy.

9. Wal-Mart now sells more food than any other store in the world.

10. Wal-Mart has approx 3,900 stores in the USA of which 1,906 are Super Centers; this is 1,000 more than it had five years ago.

11. This year 7.2 billion different purchasing experiences will occur at Wal-Mart stores. (Earth's population is approximately 6.5 Billion.)

12. 90% of all Americans live within fifteen miles of a Wal-Mart.You may think that I am complaining, but I am really laying the ground work for suggesting that MAYBE we should hire the guys who run Wal-Mart to fix the economy. Think about what’s been going on in government over the past 10 and 20 years…
a.. The U.S. Postal Service was established in 1775. You have had 234 years to get it right and it is broke.
b.. Social Security was established in 1935. You have had 74 years to get it right and it is broke.
c.. Fannie Mae was established in 1938. You have had 71 years to get it right and it is broke.
d.. War on Poverty started in 1964. You have had 45 years to get it right; $1 trillion of our money is confiscated each year and transferred to "the poor" and they only want more.
e.. Medicare and Medicaid were established in 1965. You have had 44 years to get it right and they are broke.
f.. Freddie Mac was established in 1970. You have had 39 years to get it right and it is broke.
g.. The Department of Energy was created in 1977 to lessen our dependence on foreign oil. It has ballooned to 16,000 employees with a budget of $24 billion a year and we import more oil than ever before. You had 32 years to get it right and it is an abysmal failure.

As I mentioned earlier this summer, I am working on an interview I did with Spencer Tillman, playfully titled, Superman is Alive and Well and Living in Sugarland Texas! I hope to have more details next month.

I am scheduled to be on CNBC’s The Call this Monday, August 9th, between 11:05am and 11:20am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz
Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Financial Regulation Follow Up… Good News!

(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 a follow up to last week's contribution, Financial Regulation...What It Means to You and America, I want to add two follow up points. As you may have read, I was outraged that absolutely nothing was being done to address two of the main drivers of the financial crisis, Fannie Mae and Freddie Mac. It was irresponsible for Congress to totally take a pass on that gargantuan, systemic problem. Thankfully, others felt the same way!

Earlier this week, the Obama Administration announced that a special conference will be held on Aug. 17 at Treasury to specifically address Fannie Mae and Freddie Mac. I fully applaud this effort and hope there will be bipartisan participation to solve this catastrophic mess that could end up costing the U.S. taxpayer almost one trillion dollars!

Judging by what Barney Frank recently said, I expect the implicit government guarantees to be removed in either one fell swoop, or staggered over a period of a few years. From there, it’s likely that the two behemoths would be broken up in some fashion into smaller entities which could not jeopardize the housing market or financial system if they failed.

I also want to mention another piece of the bill that makes perfect sense to me and I wholeheartedly support. It’s placing the fiduciary standard on ALL financial advisors. Although aggressively fought with enormous lobbying dollars by the major wirehouses, like Merrill Lynch, UBS and Citi, the law of the land will now force brokers to act in the same capacity as registered investment advisors (RIAs) by placing their clients’ interests ahead of their own.

(For full disclosure and transparency, I am an independent, fee only registered investment advisor or RIA. The only way I get paid is by my clients. I do not sell financial or insurance products and do not collect commissions of any kind.)

I am sure many of you always assumed all financial advisors were the same, but that was far from true. The change in the law further protects you and increases the duty to which advisors must act. For decades, only RIAs were required by law to put their clients’ best interests ahead of their own. As long as the investment was considered “suitable”, a broker was free to sell it, regardless of size of commission earned, expense ratios or possibly performance.

Fiduciaries, on the other hand, are supposed to sit side by side with their clients without obvious conflicts of interest. Plainly put, fiduciaries are supposed to do right by their clients are have been held to a much higher standard than brokers. With the passage of this legislation, the rest of the industry, more than 90%, will be now held to the fiduciary standard, a huge win for individual investors!

Don’t get me wrong. There is nothing bad about doing business with a broker as long as all of the details are transparent and properly disclosed in plain English. As a client, you should know and understand exactly what you are buying, the fees, expenses, commissions and any penalties. There are plenty of brokers who do it the right way, but also a good number who look out for themselves first.

As I mentioned earlier this summer, I am working on an interview I did with Spencer Tillman, playfully titled, Superman is Alive and Well and Living in Sugarland Texas! I hope to have more details next month.

I am scheduled to be on CNBC’s Squawk on the Street this Tuesday, Aug. 3rd, around 9:35 am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz
Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/

Financial Regulation...What It Means to You and America

(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 expected, financial regulation recently was passed in Congress and President Obama has signed that into law. As I discussed in Politicians Run Amuck… Again, my overall view is that something is better than nothing, but this bill is far, far from perfect. Historically, sweeping reform often comes with unintended consequences and this bill, just like health care reform will have its fair share.

To be clear, I have not read the almost 2000 page bill. My conclusions are drawn from a variety of research and commentary from both sides of the political aisle. I don’t want to rehash most of what I already wrote about, but there will be a few repetitive comments. First and most importantly, shame on Congress for totally and unequivocally kicking the can down the road on Fannie Mae and Freddie Mac. That is appalling! Two of the main ingredients in the financial crisis are passed over? Is Congress kidding, scared of what they may find or helpless?

President Obama pounded the table that “too big to fail” is over and we will NEVER again use taxpayer money to bailout failing institutions. Does anyone really believe that to be the case? You mean to tell me that if J.P. Morgan was on the brink of failure and needed a government backstop, the administration wouldn’t step up? That’s beyond naive to accept. We all know that Uncle Sam, whichever party is in control, would kick and scream but still come to the rescue.

I know what’s in the bill, giving the Fed and FDIC new and extraordinary powers to orderly unwind a failing institution (something I totally favor), but I just don’t buy it in times of crisis. There is no way, in my opinion, that anyone in government could have safely unwound Lehman Brothers to protect the system. And while a “bailout fund” may be created from this bill, who do you really think will end up paying for it? The banks may cut the checks, but that will certainly result from higher fees and charges to us!

The bill does address derivatives, by requiring banks to spin off certain groups under their control and move some trading to exchanges and clearing houses. Longer-term, I have to agree with this as it removes one element of potential financial Armageddon. But it does not come without cost. By spinning off these departments, banks will be required to capitalize (inject money) the new entities, further straining their own capital and reducing the amount of money to lend. That is called credit contraction, something we’ve been unsuccessfully fighting for three years. Less and tighter credit in the system will negatively impact economic growth in the short-term until the banks replenish their capital base.

The bill also limits banks from investing more than 3% of their capital in hedge funds and private equity. This provision was interesting as it suggests that somehow the hedge funds and private equity shops were a cause or accelerant in the crisis, something that is simply not true. I don’t really care if this is law, but like most major changes, it should be phased in over a period of years. I do believe it will end up hurting bank earnings.

FDIC insurance was raised to $250,000, something that I applaud and makes perfect sense. That should help keep or increase customer deposits in banks (CDs, money markets, etc.), adding revenue and strengthening their base.

A new consumer protection agency/department is being created under the Fed as I understand it. Folks, we have enough governmental agencies, units and departments to last 100 lifetimes. We need another one like the Pacific Ocean needs more water! This country will never fully recover from our economic malaise until government begins to shrink and the private sector starts expanding. Interestingly, although auto dealers originate 80% of auto loans, they were exempted from this bill. That’s somewhat dubious from my seat!

I was surprised that few people talked about one of the root causes of the crisis, leverage. Over the years, the banking and mortgage industry have created all sorts of non conventional, fancy, outside the box products that few, if any, really understood or knew how to use. If Congress really wanted to prevent another housing bubble and fix the current problem for the long-term, they should have considered requiring 20% down on all mortgages. Yes, I know that many people could not afford it, but that’s exactly what used to be the norm before we decided that owning a house was part of our right of passage in this country.

In the short-term, it would further depress an already depressed sector, but it would also begin to create a very long-term, stable and constructive housing market for decades to come. Like addressing Fannie and Freddie, this would not be politically popular (so probably very smart!) and therefore not interest the vast majority of politicians only interested in reelection, pandering to the media and special interest.

As I said, overall, the bill is something and it’s probably better than nothing, but by no means the final answer. I believe it is deflationary in the short-term and will lead to further credit contraction and harm to the economy. Financial institutions are creative, cagey and shrewd, employing some of the smartest minds on earth. Longer-term, they will likely adapt and adjust, find loopholes to make up for lost profits. I just hope that we don’t drive too much business to other shores.

I am scheduled to be on CNBC’s Worldwide Exchange this Tuesday, July 27th, from 5:35am to 5:55am.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.

Until next time…

Paul Schatz
Heritage Capital LLC
http://www.investfortomorrow.com/
http://RetirementPlanningConnecticut.com/