The 6 Week Nap

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

Imagine you have been asleep for six weeks and just woke up.  The stock market has declined five straight weeks, a rare occurrence, and is working on six today. 

The sovereign debt crisis in Europe is percolating again with Greece, Ireland and Spain teetering.  Last Friday's employment report, as you can see below, showed very few jobs being created in May with unemployment ticking slightly higher again.  As I have mentioned before, if this was a normal recovery, job growth would be soaring right about now.  Since mid 2010, we are more like hovering.

Bernanke & Company's QEII, which pumped $600B into the system will be ending in a few short weeks.  And the S&P Case Shiller Index of home prices just hit an eight year low.  Yes, you read that right.  Home prices, except the ones we are trying to buy, continue to make post crisis new lows and are back to levels not seen since 2002 and 2003.

You would be hard-pressed to "feel good" right now.  One would have thought that stocks would be down 10-20% with this horrible backdrop.  But they are not.  From high to low, the stock market has pulled back 6%, yet another 4-8% pullback that I keep discussing.

If you add in the somewhat extreme nature of the selling wave along with the surge in investors buying protective put options and newsletter writers more bearish than bullish for five consecutive weeks, you have all the makings for at least a short-term low.  I am going to stick my neck out and say that the bottom is not in place yet and will likely need one more selling wave to hammer in. 

My theme for a while has been that there should be at least one more stock market rally left IF there is a big correction coming in Q3.  I still believe that.  All the makings are there.  Failure to rally in the coming weeks would usher in some not so pleasant memories of bear markets passed, which would mean sharply lower prices very soon.  But we can cross that bridge if and when it happens.

FYI, I will be on CNBC’s Squawk Box at 6:10am on June 13.

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/

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter @Paul_Schatz

My Take on Real Estate… Not the Forecast You Want

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


Let’s pick up where I left off in Where Real Estate Is Headed… Part I. The survey I did from blog readers as well as my firm’s Street$marts subscribers yielded almost identical results; you are short-term (five years or less) negative on housing and long-term (10 years or more) positive. That’s pretty much as expected and probably similar to what folks would say around the country.

As you would also expect from reading my posts for a while, I usually disagree with the masses and do here as well. For the past 30 years, interest rates have been declining. So not only for new home buyers, but refinancers too, have only been able to make the correct decisions. Lock in a conventional 15 or 30 year mortgage and you only had to wait a short time to refinance and reduce payments or even withdraw equity. Use an adjustable rate mortgage and you were pretty much guaranteed to see your payments decline. The mortgage rate environment was simply the most favorable in the history of the market.

Why is that important? If the landscape continues to be that of lower and lower payments, demand for houses increases. And when demand increases, prices tend to rise too, until so much supply floods the market that the tide shifts in the other direction. The major tailwind (think jet flying with the wind) housing has seen since 1981 has just about died out, unless banks want to loan money without interest.

Almost as important, since the great experiment of using and living on more and more leverage (borrowing) has imploded, there’s simply not the access to capital there once was, even for good credit risks. Banks and other lenders have sharply tightened their lending standards and they are not going to make unlimited amounts of capital available like they did during the “Go Go” years.

To go one step further, we all know how important the Baby Boomers have been to the economy, financial markets and housing. Now that they are in or approaching retirement, a very large number of Boomers will downsize their lives. For many, their single biggest asset is their primary residence. Not only won’t this group be huge purchasers of real estate, they will likely be net sellers into a market where most of the 30 year tailwinds have dissipated or turned into headwinds.

In a nutshell, the longer-term prognosis for interest rates is stable at BEST, but rates will likely begin a 20 to 40 year period of rise sooner or later. Access to capital has been diminished and Baby Boomers have become net sellers. So overall, I find the former compelling case to own real estate pretty hard to swallow.

I am going to turn to the technical side with some charts and graphs. Below, you can see how new home sales have fared since the 1960s. Right now, they are back to levels usually seen at the end of recessions and right before they begin a new rising period. If this was a “normal” recovery, new home sales should be very strong in 2011 and 2012. I believe that the deleveraging process is going to trump this and 2011 will not be a bang up year, but I would love to be wrong here!

To support my point, look at chart below regarding the job market. I think it’s from Casey Research, but I cannot find the attribution. I did not create it. An important driver of real estate prices is the employment climate. Real estate super agent Judy Cooper sat with me for an hour and shared her thoughts from decades of experience. From a local level, she thought that some of the major macro trends could and have been overcome by a strong jobs market, which makes sense. The problem is that non Fairfield County Connecticut hasn’t seen a truly good employment scene in a very, very long time. We are one of the few states where people continue to leave and the business environment is and has been somewhat hostile towards corporations.


The chart below shows the massive job losses during the crisis and sharp comeback earlier this year with the government’s tsunami of programs and money into the system. But the past four months haven’t been encouraging. If this was truly a “normal” recovery from a recession, the jobs market should turn much stronger almost immediately. While I would love to see, I am certainly not planning on it, especially in non Fairfield County Connecticut.

To overwhelm you a little more, below is another great illustration, courtesy of economist supreme David Rosenberg, formerly of Merrill Lynch and now of Gluskin Sheff in Toronto.  This shows the number of residential vacancies in raw numbers as well as in percentage terms.  While it’s horrifically ugly to look at, the rate of ascent is clearly unsustainable and should begin to rollover shortly.  That’s the good news.  The bad news is that it’s going to take years and years to soak up all of the excess inventory.  Organic population growth will certainly help, but this is not solved overnight. 



While Americans are typically optimistic long-term, and rightfully so given our history, I think it’s premature on the real estate front with so many factors working against. I think the best case scenario is for stability over the next 10 years, meaning -5% to + 10%., but I repeat; I would LOVE to be proven wrong!

FYI, I will be on CNBC’s The Call at 11:05am on Wednesday, November 24.


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/

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 Paul@investfortomorrow.com.


Until next time…

Paul Schatz

Heritage Capital LLC
http://www.InvestForTomorrow.com
http://RetirementPlanningConnecticut.com/

Listen Up Congress. The Survey Says...

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


For the past few entries, I posted this link to a Very Short Survey asking your opinion on a number of “hot” topics. I’d like to focus this week’s contribution on those results and how they compare to the exact same survey I did for subscribers of my Street$marts report.

Before I begin, I received several emails questioning whether The Unsuccessful Investor (TUI) from last week's article was a real person or I just made it sound like it. TUI does, in fact, exist and it’s someone I have known for many, many, many years. Now, on to the results.

First, I am going to share the results from your answers and then I am going to share the responses from my newsletter. Growing up, I used to watch Family Feud with former Hogan's Heros star Richard Dawson. His famous line, after kissing all the women was,

"The survey says..."

The government’s TOP priority should be:

59% Job Creation
17% Healthcare Reform
16% Deficit Reduction
5% Wars

That compares to my list of:

61% Job Creation
24% Deficit Reduction
10% Healthcare Reform
6% Wars

In 2008, I voted for:

60% Obama
35% McCain

That compares to my list of:

34% Obama
59% McCain

Based in the past year, I would:

53% Reelect Obama
47% Elect someone else

That compares to my list of:

27% Reelect Obama
73% Elect someone else

Congress is doing a:

87% Poor job
13% Good job

That compares to my list of:

93% Poor job
7% Good job

My income level in 2009 was:

21% <$50,000
50% $50,000 - $125,000
28% $125,000 - $250,000 1% >$250,000

That compares to my list of:

11% <$50,000
26% $50,000 - $125,000
37% $125,000 - $250,000
26% >$250,000

Overall, you feel that job creation should be the government’s top priority and I imagine that holds true throughout the country. You voted for Barack Obama, pretty much in line with the rest of the state, which is in stark contrast to my newsletter readers who supported McCain by a sizable margin. Not surprising at all, more than half would reelect Obama, versus my newsletter readers who would elect someone else by an enormous margin. That’s expected since they didn’t vote for him in the first place.

It seems almost universal that the vast majority of folks do not think Congress is doing a good job, but do we ever? I wonder how high that’s been in the past 20 years. My guess is, not very. The total disdain and disapproval of Congress has to be at an all time low. Judging by the overwhelming number of comments, which I did not publish, there seems to be some serious venom for both parties and everyone is sick and tired of the partisan politics, lying and failure to do what their voters elected them to do.

Thank you for participating in the survey. It always interesting to see where people stand on the hot issues of the moment.

Please 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/

Economy Approaching 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)

It's been no secret that I have been a huge skeptic of the so-called economic recovery. To me, the world has been and is being held together with duct tape (may all time favorite product) and band-aids. Without the tsunami of cheap and easy money along with all the other government rescues and bailouts, there would be no "recovery".

The long-term problem is not that the government has intervened like no time before in our history, although I do not totally agree with all of it. The issues are that:

• The only real employment growth is in government.


• The economy cannot live without the massive stimulus.


• Private capital is not lining up to replace the government.


• Entrepreneurship is just about dead.


• Taxes are set to go up, up, up at precisely the wrong time.


• Washington is broken.
  

There are two ways to look at those comments. It's often darkest before dawn and the almost always resilient U.S. economy is about to surge higher. OR, we've been given an 18 month reprieve and trouble lies ahead. Until proven otherwise, and maybe the stock market is telling me I am a dummy, I have to stay on the troubled side.

The recession was not your run-of-the-mill variety with inventory correction and inflationary pressures that's easily recovered from. It was credit contraction (deflation) based and the only two modern day precedents, Japan 1989-present and the U.S. in the 1930s, didn't work out so well!

It took us until the end of WWII, some 10 years later before the economy turned for good. And Japan STILL hasn't figured out how to divorce itself from the death grip of deflation with all of their demographic issues. But opening their borders would be a start!

I came across the following piece from John Mauldin, who quoted former Merrill Lynch Chief Economist David Rosenberg (currently at Gluskin, Sheff), that I wanted to share regarding issues with the nascent recovery.

More than five million homeowners are behind on their mortgages.There are over six million Americans who have been unemployed for at least six months, a record 40% of the ranks of the jobless.
The private capital stock is growing at its slowest rate in nearly two decades.
Roughly 30% of manufacturing capacity is sitting idle.
Nearly 19 million residential housing units, or about 15% of the stock, is vacant.
One in six Americans is either unemployed or underemployed.
Commercial real estate values are down 30% over the past year.
The average American worker has seen his/her level of wealth plunge $100,000 over the last two years, even with the recovery in equity markets this past year.
Bank credit is contracting at an unprecedented 15% annual rate so far this year as lenders sit on a record $1.3 trillion of cash.
Unit labor costs are down an unprecedented 4.7% over the past year, and what has replenished household coffers has been the federal government, as transfer payments from Uncle Sam now make up a record 18% of personal income (and the Senate just passed yet another jobless benefit extension bill!)."

All things considered, I find it hard to fathom that any type of “real” historical economic recovery is close at hand. The best case continues to be a slow plodding through that lasts several years and allows our problems to heal over time with good policy, assuming we begin to control our budget deficits.

Please 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/

Help for Delinquent Consumers

Consumer delinquency rates in the third quarter hit record highs across the three key categories of home equity loans, home equity lines of credit and bank cards, the American Bankers Association said Thursday.

The ABA’s Consumer Credit Delinquency Bulletin defines delinquency as a late payment that is 30 days or more overdue.

Bank card delinquencies rose 26 basis points to a record 5.01 percent of all accounts. Record delinquency rates occurred in home equity loans - up 49 basis points to 4.01 percent of all accounts – and in home equity lines of credit – up three basis points to 1.92 percent of all accounts.

The association’s composite ratio, which tracks eight closed-end, installment loan categories, also hit a record high at 3.35 percent of all accounts (seasonally adjusted), compared to 3.23 percent of all accounts in the second quarter.

A closed-end loan provides a fixed amount of money with a fixed repayment period and regularly scheduled payments.

ABA Chief Economist James Chessen said in a statement that the high consumer credit delinquency rates represent the cumulative effect of the longest recession since the Great Depression.

“Six consecutive quarters of job losses have taken their toll,” Chessen said. “With jobs lost and work hours cut, it doesn’t take long for the financial pressure to become overwhelming. Falling behind on debt payments is an unfortunate side effect of high unemployment and a frozen job market. The picture won’t change until the labor market improves and the economy picks up steam. This is going to take time.”

Auto loans also saw payment declines, however, there was some improvement in the third quarter.

Direct auto loan delinquencies fell 55 basis points to 2.46 percent of all accounts and indirect auto loan delinquencies – which are on loans arranged through auto dealers - dropped to 3.26 percent of all accounts from 3.42 percent in the previous quarter.

“The good news is that consumers are clearly being more cautious by saving more, spending less and making great efforts to repair their balance sheets,” Chessen said.

A new survey of public views on the economy, released this week, showed that 57 percent of Americans are close to someone who has been laid off, 61 percent report that someone close to them has had their hours or pay cut and 44 percent of all households have experienced one or the other during the past year.

The "Tracking the Recovery" survey was conducted among 802 registered voters nationwide from Sept. 21 to 23 by Hart Research Associates for the Economic Policy Institute, a think tank in Washington, D.C. that researches the impact of economic trends and policies on working people in the U.S. and worldwide.

Donald Klepper-Smith, chief economist and director of research at DataCore Partners LLC in New Haven, said that in the current economic environment, every dollar counts and every job counts.

“As unemployment rates rise and incomes remain stagnant, I think we’re going to continue to see increases in non-performing loans,” Klepper-Smith said.

Here are some tips from the ABA on managing debt:

For homeowners having trouble paying their mortgage, the American Bankers Association "strongly recommends" you consult HOPE NOW, an initiative coordinated between counselors, investors and lenders to help homeowners in distress. Call 1-888-995-HOPE.

For others who are having trouble paying down debts, ABA advises taking action -- sooner rather than later -- to solve debt problems:

· Talk with creditors – the sooner you talk to them, the more options you have;
· Don’t charge more purchases until your problems are solved;
· Avoid bankruptcy – it’s a short-term solution with long-term consequences; and
· Contact Consumer Credit Counseling Service at 1-800-388-2227.

For more information on budgeting, saving and managing credit, visit the ABA Education Foundation’s consumer web page.