For further information, contact:
Paul Schatz, Founder and President
Heritage Capital, LLC
*** For Immediate Release ***
Liquidity Trap Ahead For Investors
Says Heritage Capital's Paul Schatz
WOODBRIDGE, CT - April 25, 2011 -
With three straight strong quarters for the stock market, including in a 5.40% gain for the S&P 500 in the first quarter of 2011, investors are regaining their faith in the stock market. But that faith may be misplaced the further into 2011 we go, warns investment strategist Paul Schatz, president of Heritage Capital in Woodbridge, CT. “This entire bull market has surfed a tsunami of liquidity. When that liquidity begins to dry up and then be removed, it will be like running into a 50-mile-an-hour headwind.”
“My advice to investors in the short term is to enjoy what gains are left, but dance very close to the door. Whatever you buy or hold, have a hard or mental stop as to when you will get out,” he said.
The problem, according to Schatz, is that the Federal Reserve’s quantitative easing (QE2), which has pumped a torrent of liquidity into the market, will end in June along with some very positive seasonal trends. Without QE2, as we saw in May and June 2010 with a 17% correction, liquidity will certainly dry up. “When QE2 ends, it will have a tremendous impact on the financial markets. Junk bonds and small caps should tail off first, followed by key sectors until nothing is left standing,” he said. “I have not and do not believe the markets can stand on their own two feet. The only thing in the markets’ favor is momentum and momentum wanes very quickly in today’s global markets.”
Before that occurs, Schatz anticipates a momentum driven peak later this quarter, possibly taking the Dow Jones Industrials to the 13,000 range. The peak will be followed by a few small pullbacks and rallies, with each rally a little weaker. By the third quarter, Schatz believes the market will see a substantial correction.
“When stocks start to come off the peak, you need to be asking these questions:
• Are high yield bonds still leading?
• Are transports confirming the action in the industrials or vice versa?
• Is the breadth of the rally still broad?
• Are key sectors leading the way higher?
“If your answers are ‘no, no, no and no,’ look for an exit,” said Schatz.
For now, Schatz sees potential problems only in the answer to #4 where two key sectors, semiconductors and financials, are acting poorly.
Schatz’s favorite sectors for the moment are energy, metals (gold and silver mining stocks) REITs, healthcare and high yield. These sectors helped propel the Heritage Capital Relative Strength Sector strategy to a 4.98% gain net of fees for the first quarter. The sector program was only outpaced by Heritage Global Asset Allocation with a 5.2% gain; Intermediate-Term Gold at 3.44%; Diversified Growth at 3.35% and Heritage Spectrum with a 2.61% gain. Heritage’s Developed Markets strategy returned 2.59% for the quarter, while Short-Term Gold gained 2.33% and the Heritage High Yield strategy gained 1.73%. The firm’s only negative program for the first quarter was Emerging Markets with a -6.28%. All performance is net of Heritage Capital’s management fee.
Overall, the quarter was a fairly easy one for investors, Schatz explained. The market moved essentially straight up with the exception of short-term reactions to the Japanese tsunami and events in Libya. Since the start of April, the emerging markets sector has resolved itself to the upside and is performing well, he said.
Schatz does not view the potential for inflation a primary concern right now; that will be for after the next recession. He explained that the current inflation is commodity driven, and while that is difficult at the pump and in stores, it is easily countered by changing consumer habits and even higher prices. For example, Americans have dramatically reduced their gasoline consumption and are using the least amount of gas per capita in 20 years. “Structural, systemic inflation feeds on money velocity, wage growth and tight labor. None of which is happening or even close,” he said.
“For four years, deflation has been my number one concern and I am still concerned,” Schatz said. “The housing market is still a disaster, jobs numbers are nowhere near inflationary levels, we have excess capacity in the factories, and the banks and corporations are hording cash. Those are all deflationary factors.”
Among Schatz’s favorite long-shot, contrarian investments are the U.S. dollar and Treasury bonds. “I believe a long-term bull market in the dollar began in March of 2008. We’ve spent the last three years building an enormous base for a huge move in 2012 and beyond. Another positive for the dollar and T-bonds is that no one is positive. There are virtually no dollar bulls or T-bond bulls. The dollar is the most unloved investment in the world with T-bonds not too far behind. If you believe, as I do, that the majority of investors are wrong at precisely the worst time, these are investments to watch.”
Heritage Capital follows an active investment approach in all of its models, shifting investment positions to take advantage of trends developing in the market, or to avoid periods of greater risk. Client accounts are typically allocated among the different strategies based on the individual's risk profile.
Paul Schatz has been active in the financial markets for more than 21 years, including positions as chief investment officer for a regional advisory firm and equities trader with Shearson Lehman Brothers and Cowen & Company. Heritage Capital offices are located at 1 Bradley Road, Suite 202 in Woodbridge, CT.
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Heritage Capital Inc. is a registered investment advisory firm that
utilizes an active management approach in its investment strategies.
Active management seeks to take advantage of market cycles to position
portfolios in rising asset classes and avoid declining investment classes
by following market trends. Schatz has been active in the financial markets
for more than 15 years, including positions as chief investment officer for a
regional advisory firm and equities trader with Shearson Lehman Brothers and Cowen & Company.
Heritage Capital offices are located at 1 Bradley Road, Suite 202 in Woodbridge, CT.
Heritage Capital strategy results portrayed in this release reflect actual
fee paying accounts' performance of the strategies for the identified time
period. The information given is historic and should not be taken as any
indication of future performance. Investment return and account value will
vary so that at any given time an account may have a gain or loss. Market
volatility can significantly impact short-term performance. Results of an
investment made today may differ substantially from the performance shown.
The possibility of loss always exists.
# # #
Heritage Capital LLC ("Heritage"") composite performance results represent time-weighted actual
performance results for continuously managed Heritage accounts, which individual accounts Heritage
believes to be representative of its investment management process (i.e. mutual funds and exchange
traded funds) for each specific strategy during the corresponding time period. The composite
performance results reflect the reinvestment of dividends and other account earnings, and are
net of applicable account transaction and custodial charges, and the separate fees assessed directly
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and the maximum investment advisory fee that the accounts would have incurred (by applying the
Heritage's current investment advisory fee of 2.00% as set forth in its current written disclosure
statement) during the corresponding time periods.
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