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LATEST - 3/21/2019


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As market indicators go, the president trumps everything
Author: Jeff Benjamin
Date: Jun 6, 2019
Publication: Investment News
Link to Article

Quantifying news reports about Trump can help predict where markets are heading

Whether you like him or not, President Donald J. Trump is having a measurable impact on the financial markets, although maybe not in the ways he expects or would prefer.

"Trump has a particular talent for causing wedges, driving markets and providing leading signals," said Zak Selbert, chief executive and co-founder of Indexica, an alternative data firm that measures the impact of news reports on financial markets.

Mr. Trump is far from the sole focus of Indexica, but he is providing the steadiest stream of quantifiable data.

Firms in the alternative data space like Indexica are obsessed with measuring things that have been difficult to measure. Some firms will measure credit card data or satellite imagery, for example. But Indexica uses textual data, where 90% of all information resides.

"It's the low-hanging fruit," Mr. Selbert said. "News data is narrating what's happening around the world."

Enter Mr. Trump.

"We built this under the assumption that anything can move markets," Mr. Selbert said. "It just turns out that Trump happens to move lots of markets."

What's unique and important to understand is that the Indexica analysis is not related to the president's social media activity or any social media reactions. Those often draw lots of attention but their impact on markets is usually short-lived.

"How Trump moves markets in the short term is that the markets react in three seconds and there's no way to predict that, so it's not helpful to pay attention to his tweets," Mr. Selbert explained. "We're paying attention to the broader conversation around Trump, because the news will continue to impact markets for weeks."

An example of how the research applies to investing is found in Indexica's BuzzSentiment metric, which measures the ratio of news related to the president.

While the metric found that most news reports related to Mr. Trump qualify as negative, the data show that a spike in the volume of news reports that are also negative toward the president is a dependable predictor of market volatility.

"If you model the BuzzSentiment of Trump to a broad index like the S&P 500, we have found when the combination is such that Trump is being spoken about more often in a negative tone, equities become more volatile, which usually implies equities will decline," Mr. Selbert said. "The key is it has to be more than the moving average, because generally he is being spoken about a lot in a negative tone."

The looming global trade war is another example of how the data are being applied.

"Some countries do well under a trade war and some won't, but you have to quantify what Trump says and how the news is responding, and then you look at how it peaks and evolves," Mr. Selbert said. "That gives you a predictive signal of how the markets react."

This kind of alternative data is currently most popular with hedge fund managers but has the potential to migrate into retail-class products like mutual funds and exchange-traded funds.

The general idea is to identify leading indicators of asset movements, which could be anything from political news to weather-related items.

"Trump happens to come up a lot because he really moves markets in a systematic way," Mr. Selbert said. "He incites extreme levels of emotion and news discourse, and he takes up a lot of space, and the discourse around him is so erratic."

Of course, not everyone is sold on the idea that news reports about the president are indicators of market direction.

"While they attempted to quantify the Trump factor, they basically said it's all short-term noise," said Paul Schatz, president of Heritage Capital.

"Markets are like a flowing river," Mr. Schatz said. "They can be temporarily diverted or held back, but in the end, they will find their own levels and end up wherever they were going in the first place."


Selling because of the trade war turbulence could cost you a lot of money over the long term
Author: Fred Imbert
Date: May 16, 2019
Publication: CNBC
Link to Article


KEY POINTS:
  • Investors who tried to time the market and missed the 10 best days between 2003 and 2018 posted about half the return of those who remained fully invested, according to data from Putnam Investments.

  • Volatility spiked earlier this month as the U.S. and China hiked tariffs on billions of dollars worth of their goods. This knocked the S&P 500 from a record high.

  • But experts see this as a long-term buying opportunity as fundamentals remain positive and a trade deal is still expected.
The volatility in the stock market has recently picked up amid an escalating trade war between the U.S. and China, but regular investors with a long-term horizon are better off just riding out the tough times, even when they get pretty scary, history shows.

People who tried to time the market and therefore missed the 10 best days for the S&P 500 between 2003 and 2018 posted about half the return of those who remained fully invested, according to data from Putnam Investments. Those who missed the 20 best days saw their returns slashed by two-thirds compared with investors who stayed in.

Volatility spiked earlier this month as the U.S. and China hiked tariffs on billions of dollars worth of their goods. This knocked the S&P 500 from a record high. But many pros see this as a long-term buying opportunity as fundamentals remain positive and a trade deal is still expected.

“When you put it all together, this is a healthy time to come into the market for the long term," said Thorne Perkin, president of Papamarkou Wellner Asset Management. "We always look at these pullbacks as buying opportunities for the long term."

U.S. economic growth surged to start 2019. First-quarter GDP grew at a 3.2% annualized pace, marking the best economic start to a year since 2015.

Employers also keep hiring at a strong pace. Last month, 263,000 jobs were added to the economy while the U.S. unemployment rate fell to its lowest level since 1969. Job gains have averaged 205,000 per month in 2019.

“The fundamental backdrop is still fairly solid. The big economic - GDP, nonfarm payrolls - they keep exceeding expectations. That does not happen at the bull market's end," said Paul Schatz, president of Heritage Capital. "The underpinnings of the market are too strong for a bear market to begin."

To top it off, the Federal Reserve slashed its rate hike forecast for 2019 to zero from four as inflation remains below the central bank's 2% target.

The pivot, which came after the Fed raised rates four times in 2018, has also increased the possibility of a rate cut. Market expectations for a rate reduction between now and the start of next year are at 80%, according to the CME Group's FedWatch tool.

The strong economic data and the Fed's shift coincided with corporate earnings growth that has topped analyst expectations. Corporate earnings are up more than 1% for the first quarter. Analyst polled by FactSet expected corporate profits to have fallen by 4.2% to start off 2019.

"Year to date, there have been three things driving the market: perceived progress on trade, stabilization of the interest-rate environment and better-than-expected earnings. In the short term, the volatility is coming from the trade piece," said Craig Birk, chief investment officer of Personal Capital. "The short term is really unpredictable. Long term, a lot of the things that helped drive this rally are still in place."

The recent volatility upswing started after President Donald Trump threatened to hike tariffs on $200 billion worth of Chinese goods. Since then, the S&P 500 has dropped more than 3%. Trump later followed through on his threat and China retaliated by raising levies on $60 billion worth of U.S. products.

CNBC

Higher tariffs led to increasing fears that corporate earnings growth could slow down, thus hurting the global economy.

But while tensions have flared up, strategists still expect the two sides to strike a trade deal eventually. Jan Hatzius, chief economist at Goldman Sachs, wrote in a note that he expects the two sides to reach a deal by the end of June. Trump and Chinese President Xi Jinping are expected to meet at the G-20 summit next month. Bo Zhuang, chief China economist at TS Lombard, noted "the fundamentals call for [a] deal."

"With China, it's long overdue that we keep them in check. They steal intellectual property, they do not provide fair access to markets, they don't play generally by the rules," said Perkin of Papamarkou Wellner Asset Management. "But to me, trade wars are bad. No one really wins in this scenario, but it certainly hurts China more."


Why buying Lyft or Uber stock with your mom's money isn't a good idea
With: Brian Sozzi
Date: May 7 2019
Publication: Yahoo! Finance
Link to Article



The losses are just too staggering at buzzy ride-sharing IPOs Lyft and Uber to confidently invest your money, says one market veteran.

“I wouldn’t buy [Uber or Lyft] with your money,” opined Paul Schatz, president and chief investment officer of Heritage Capital, on Yahoo Finance’s The First Trade on Tuesday. Schatz said he prefers to wait several months on a red-hot IPO before considering to get into the stock. “Most hot IPOs see that initial burst of emotion or momentum fade out. I like to wait at least two to four months.”

When it comes to both Lyft and Uber, Schatz probably has a point.

Lyft’s bottom line is nothing to write home about, a factor many on Wall Street (who remain absurdly bullish on Lyft) have seemed to forget. While Lyft saw sales more than double to $2.2 billion in 2018, it lost about $911 million.

The company is widely expected to deliver another staggering loss when it reports first quarter earnings Tuesday after the close of trading. It’s also likely Lyft reports continued slowing in key operating metrics such as bookings, active riders and the amount spent per active rider.

Many on Wall Street — despite the barrage of Buy ratings on the stock — don’t expect Lyft to earn a profit until 2022, at the earliest.

Subsequently, Lyft’s stock has reflected concerns about its losses. At $60.83, Lyft’s stock remains well below its first trade on its late March IPO day of $88.60. The stock is also trading below the $72 a share it was priced at on the roadshow.

Uber’s financial standing is in worse shape than Lyft’s as it eyes its debut on the New York Stock Exchange later this week. Schatz believes Uber and their bankers have learned a lesson from Lyft so the “price will be more reasonable and I don’t think you’ll see an enormous wave of selling out of the gate.”

“I think they run a better company and they got their hands in many more pods than Lyft does,” he added.

The owner of Uber Eats and its eponymous ride-hailing service saw its sales spike 43% last year to $11.3 billion. But, the company lost $3 billion on top of a $4 billion loss in 2017. Overall growth continued to slow in most areas of Uber’s business, too.

Uber’s cash flow from operations the past three years was an outflow of $5.8 billion.


The longest bull market in history can't shake the skeptics
Author: Jeff Benjamin
Date: May 3, 2019
Publication: Investment News
Link to Article

Investors abandon equity mutual funds as the S&P 500 logs a 16% gain

With the S&P 500 Index up more than 16% from the start of the year, the current bull market is officially the longest on record. But the latest mutual fund flow data suggest retail investors might be getting tired of the run.

This year through April, global equity mutual funds have experienced more than $134 billion worth of net outflows, including more than $56 billion from U.S. mutual funds, according to the Investment Company Institute.

"This continues to be the single most hated and disavowed market of all time," said Paul Schatz, president of Heritage Capital.

"There are an overwhelming number of things to be worried about, so that has the average person pulling money out of the market," Mr. Schatz said. "But the thing is, the things people are worried about are not well-founded, and the market just doesn't care."

At least part of the pullback by retail investors can be attributed to the stock market's sudden decline of 13% during the fourth quarter, said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

"Investors that got nervous in the fourth quarter and retreated have missed out," he said. "Investors can be very bad at timing, but it is very hard to time the market."

From the March 9, 2009, low through Thursday, the S&P has produced a compound annualized return, including dividends, of nearly 18%.

"Even Warren Buffett isn't getting returns like that," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "You won't get that sitting in CDs."

Mr. Silverblatt believes retail investors should be getting on board the ride being provided by strong economic fundamentals and increasing corporate activity.

"The economy is still doing well, housing is doing well, and interest rates are still at historic lows, which means mortgages will stay low and corporations have easy access to borrowing," he said.

The corporate influence on the markets, Mr. Silverblatt said, is showing up as record-level capital expenditures, stock buybacks and dividends.

"Companies have more money because their taxes are lower," he said. "And, you could argue about the ways corporations are spending their money, but they are spending it, and that is driving the market higher."

While some see the corporate activity as an example of the smart money moving against the grain of retail investors, the corporate spending practices that are driving the market higher could also be viewed as a bearish indicator.

"If a corporation has run out of ideas [on which to spend money] as far as new products or new factories, then that may be a sign of bad times to come," said Kashif Ahmed, president of American Private Wealth.

"I think there is more under the surface," Mr. Ahmed said. "With many politicians, especially those on the left aspiring to move into the Oval Office, coming out with what I consider anti-capitalism or anti-free-market policy proposals like limiting buybacks, corporations may simply be trying to get ahead of any of these potential policy proposals becoming reality."

Mr. Schatz of Heritage Capital also thinks that politics is playing a role in market activity.

"Since the 2016 presidential election, people have been looking for reasons not to be invested, and that's the exact opposite of what a successful investor does," he said. "A successful investor looks for a reason to be invested because the market is positive 70% of the time."


9 popular companies that paid $0 in taxes for 2018
With: Aarthi Swaminathan
Date: Apr 15, 2019
Publication: Yahoo! Finance
Link to Article

A new report reveals that some American companies didn't just pay no taxes last year - they paid negative taxes.

The report by D.C.-based think tank Institute on Taxation and Economic Policy (ITEP) looked at how Fortune 500 companies have been affected by U.S. President Donald Trump's 2017 Tax Cuts and Jobs Act (TCJA) and found that 60 of America's biggest corporations paid $0 in taxes this year.

In other words, instead of having to pay the standard 21% corporate tax rate (which is down from 35% after the new tax law), these companies collectively enjoyed a roughly -5% average effective tax rate from $4.3 billion in rebates.

Notable consumer names on the list include Gannett (GCI), IBM (IBM), Activision Blizzard (ATVI), JetBlue Airways (JBLU), Deere (DE), Delta Air Lines (DAL), Whirlpool (WHR) and Netflix (NFLX). One company that got a lot attention, Amazon (AMZN), brought in the most profit at $11 billion in 2018 and paid an effective tax rate of -1%.

Here’s the top of the list, ranked by effective tax rate:

The 60 companies ranked by their effective tax rate (Source: ITEP analysis of SEC filings).

Gannett biggest beneficiary of relative tax rates

Overall in 2018, corporations paid just 7% of their profits as federal taxes, according to data provided to Yahoo Finance by research firm Oxford Economics. That’s the lowest effective tax rate since at least 1947.

The top beneficiary - in terms of effective tax rate — was media company Gannett. While it only earned $7 million in income in 2018, it also earned tax credits of $11 million, netting a -164% effective tax rate.

The company, which is in the process of evaluating a hostile bid from hedge fund Alden Global Capital, consists of more than 100 daily newspapers, from USA Today to the Detroit Free Press.

Gannett has been granted nearly $19.9 million in state and local tax subsidies over the years - with more than half coming from New York state - according to D.C.-based nonprofit Good Jobs First, which tracks public subsidies to companies.

IBM

Computing giant IBM ranked second with an effective tax rate of -68%. It was followed by Activision Blizzard, infrastructure company AECOM Technology (ACM), and technology company Pitney Bowes (PBI).

IBM has secured a number of subsidies over the years from state and local governments that ring to the tune of $1.4 billion.

The company also has in its pocket federal loans, loan guarantees and bailout assistance at around $5.4 billion. Again, New York gave IBM the most money over the years.

The company came under fire in 2014 after it was reported that it had parked some of its earnings in low-tax countries to boost profits.

After routing almost all its sales in Europe, Middle East, Africa, Asia and some of the Americas through its Netherlands unit, it gradually reduced its tax rate over 20 years - at the same time pretax income quadrupled.

IBM wasn’t the only one playing this game - which at the time was technically legal. Big blue-chips like Apple, Pfizer and Microsoft also stashed trillions offshore to pay higher corporate taxes domestically.

Energy and airlines

Out of all the companies on ITEP's list, while Duke Energy (DUK) didn't have the lowest effective tax rate, it got the biggest federal income tax rebate of $6.47 billion.

The Charlotte, North Carolina-based utility giant that operates oil and gas utilities in 7 states, on top of owning nuclear power plants and gas transmissions lines was one of the companies that used accelerated depreciation - where it writes off the cost of their capital investments much sooner than the investments actually wear out - to reduce their tax rates.

Duke also enjoyed $129 million in renewable energy production credits in 2018, according to ITEP.

Interestingly, in January Duke also offered its own rebates to customers who chose to install solar panels on their roofs in North Carolina.

Airlines were also featured heavily further down the rankings. While Alaska (ALK) and Delta (DAL) earned federal tax credits of less than 5%, New York-based carrier JetBlue netted -27% in effective tax.

Stock market darlings Amazon and Netflix also made a cameo, having paid no taxes in 2018. This isn't the first year that these tech companies are enjoying tax breaks. In an earlier story, we reported that Amazon had also paid $0 in taxes in 2017 as well.

'Nothing obviously illegal' "Reducing tax through incentives usually results in corporations doing something good with the money either through CAPEX or hiring or comp or buybacks," Heritage Capital President Paul Schatz told Yahoo Finance. "And it's not a one shot deal in one single year. That's a permanent reduction that plays out over a long period which is supposed to result in better growth for the companies and the economy."

Kyle Pomerleau of D.C.-based think tank Tax Foundation told Yahoo Finance that going after incentives - something Senator Elizabeth Warren is proposing - wouldn’t necessarily help increase tax revenue, pointing out that there was a nuance in ITEP’s understanding that was missing.

Financial profits — the measure used by ITEP - is meant "for investors to understand how well a company is doing in any given year," Pomerleau said, but "it is not the same as taxable profits reported to the IRS."

That means some of these companies getting these rebates sometimes are doing so because they have incurred heavy losses in previous years. Or companies could be utilizing accelerated depreciation - which was introduced as part of the new tax law. And those actions aren’t necessarily intended to deceive.

"The fact that these deductions create a wedge between financial and taxable profits is somewhat irrelevant," Pomerleau said.

Consequently, according to Pomerleau, reducing incentives in a way Warren proposed wasn't a fantastic idea.

"In fact, I actually think raising taxes on the rich is more efficient than eliminating expensing for companies," he said.

ITEP asserted that while "there is, to be clear, nothing obviously illegal about the vague language these companies use to describe their tax provisions... lawmakers interested in enacting true tax reform should critically assess the costs of each of existing tax break - including those discussed in this report - and take steps to ensure that profitable corporations pay their fair share of U.S. taxes."

Schatz also admitted that out of all the subsidies, perhaps it was time for the U.S. to stop coddling one industry:

"The energy industry is doing just fine as are those corporate behemoths in farming and it's about time we remove those sector specific tax breaks,” Schatz said. “We should stop picking and choosing winners."


Amazon Employees are Listening to Conversations of Users Through Alexa: RPT
With: Julie Hyman, Adam Shapiro, Sibile Marcellus & Andy Serwer
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Alexa, Are You Recording Me? According to a Bloomberg report, Amazon employees are listening to conversations of users through Alexa. Yahoo Finance's Adam Shapiro, Julie Hyman, Andy Serwer, and Sibile Marcellus join Heritage Capital President Paul Schatz to discuss.


Amazon vs. Walmart: Retail competitors call each other out
With: Julie Hyman & Adam Shapiro
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's Jared Blikre reports on the 2018 Amazon Letter to Shareholders released by CEO Jeff Bezos. YF's Kristin Myers also joins Julie Hyman, Adam Shapiro, and Heritage Capital President Paul Schatz to discuss Amazon and Walmart calling each other out for worker pay and tax returns.


EU extends Brexit Deadline to Halloween
With: Julie Hyman & Adam Shapiro
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's Oscar Williams-Grut reports to about the EU's vote to extend the Brexit deadline. Heritage Capital President Paul Schatz joins the panel to further discuss with Yahoo Finance's Adam Shapiro, Julie Hyman, and Andy Serwer.


EU extends Brexit Deadline to Halloween
With: Julie Hyman & Adam Shapiro
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's Oscar Williams-Grut reports to about the EU's vote to extend the Brexit deadline. Heritage Capital President Paul Schatz joins the panel to further discuss with Yahoo Finance's Adam Shapiro, Julie Hyman, and Andy Serwer.


Uber hopes for valuation of $90-$100 billion
With: Julie Hyman & Adam Shapiro
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Managing Director of Equity Research at Wedbush Securities Dan Ives explains what's in store for Uber as it aims for a valuation lower than analyst expectations. Heritage Capital President Paul Schatz joins the panel to discuss with Yahoo Finance's Adam Shapiro, Julie Hyman, and Andy Serwer.


Uber seeks IPO valuation of $100 billion
With: Adam Shapiro & Julie Hyman
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Heritage Capital President Paul Schatz and Ironsides Macroeconomics Managing Partner Barry Knapp join Yahoo Finance's Julie Hyman and Adam Shapiro to discuss Uber's IPO valuation.


Disney Investor Day Preview
With: Adam Shapiro & Julie Hyman
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's JP Mangalindan gives Adam Shapiro, Julie Hyman, Ironsides Macroeconomics Managing Partner Barry Knapp and Heritage Capital President Paul Schatz a preview of what to expect for Disney Investor Day.


China Offers to Open Its Cloud-Computing Sector: RPT
With: Adam Shapiro & Julie Hyman
Date: Apr, 11 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's Adam Shapiro, Julie Hyman, and Andy Serwer join Heritage Capital President Paul Schatz to discuss tech and the trade war.


Last minute tax filing tips for 2019
With: Samantha Miller
Date: Apr 04, 2019
Publication: WTNH - NEWS 8
Link to Article



(WTNH) - Have you filed your taxes yet? If the answer is 'no.' you're running out of time, but it's not too late!

Financial Expert Paul Schatz shares his last minute tax reduction tips in the interview above.


US stocks climb after Fed leaves rates unchanged
Author: FOX Business
Date: Mar 21, 2019
Publication: FOX Business - Charles Payne
Link to Article



Kingsview Asset Management CIO Scott Martin and Heritage Capital President Paul Schatz discuss how U.S. stocks are reacting to the Federal Reserve’s policy decision and where investors are finding value in today’s market.


Market growth ‘is just right’ after Fed leaves rates unchanged
With: Alexis Christoforous, Brian Sozzi, Scott Gamm
Date: Mar 21, 2019
Publication: Yahoo! Finance
Link to Article



Paul Schatz, President and Chief Investment Officer of Heritage Capital, says “the market has priced in what the Fed should have been doing all along” and adds that growth is decelerating but “is just right for right now.” Yahoo Finance's Alexis Christoforous speaks to him, Scott Gamm and Brian Sozzi.


Biogen halts trial of its Alzheimer’s drug Aducanumab
With: Alexis Christoforous, Brian Sozzi, Scott Gamm
Date: Mar 21, 2019
Publication: Yahoo! Finance
Link to Article



Biogen decided to end its phase 3 trial of its Alzheimer’s drug Aducanumab. Heritage Capital LLC President Paul Schatz and Yahoo Finance’s Brian Sozzi, Scott Gamm and Alexis Christoforous break down the impact on the company.


Better economic data needed before Wall Street can rise back to all-time high
Author: Fred Imbert
Date: Mar 16, 2019
Publication: CNBC
Link to Article


KEY POINTS:
  • The Dow Jones Industrial Average and S&P 500 are both 4 percent away from their all-time highs.

  • However, the main catalysts that led stocks to this point — declining worries over China trade and Fed monetary policy - have largely been priced in. Meanwhile, the economic data have been mixed at best.

  • "What the market needs and must have is a spate of data suggesting the economy continues to expand, albeit slowly, but not stalling," says Quincy Krosby of Prudential Financial. "That worry that the economy could stall out has the market worried."
Stocks kicked off 2019 with a bang as U.S.-China trade tensions simmered while the Federal Reserve signaled patience in raising rates. However, stocks will need improving economic data to make a run at the record levels set last year.

The Dow Jones Industrial Average and S&P 500 are both 4 percent away from their all-time highs. The Nasdaq Composite is trading about 5.5 percent away from its record. However, the main catalysts that led stocks to this point — declining worries over China trade and Fed monetary policy — have largely been priced in. Meanwhile, the economic data have been mixed at best.

The recent weakness in economic data comes as at a time when global central banks fret over a potential slowdown in the global economy, which investors fear could hurt corporate profits.

"What the market needs and must have is a spate of data suggesting the economy continues to expand, albeit slowly, but not stalling," said Quincy Krosby, chief market strategist at Prudential Financial. "That worry that the economy could stall out has the market worried."

The Citi Economic Surprise Index, a widely followed barometer of how economic data do relative to economist expectations, is currently near negative 35 and hit its lowest level since August 2017 earlier this month. A negative print on the index shows a majority of economic data are missing estimates; a positive print indicates data are outperforming expectations.

Heritage Capital
Source: FactSet

U.S. jobs creation came near to a screeching halt in February as only 20,000 jobs were created. While some experts attributed the weak print to factors like the weather and the government shutdown, it was still the worst month of jobs creation since September 2017.

The National Federation of Independent Business' small-business optimism index, meanwhile, remained near its lowest levels since the 2016 election in February despite inching higher.

Retail sales, a widely followed barometer of consumer health, unexpectedly rose 0.2 percent in January. However, December sales were revised down to show a 1.6 percent decline.

"[Monday's] retail sales report wasn't enough to clear the earlier one out,” said Robert Pavlik, chief investment strategist at SlateStone Wealth. "December is still a question mark in people's minds."

"You have to see an improvement in retail sales," he said. "That's another potential catalyst."

US-China trade deal won't be a 'rally maker'

Investors are increasingly looking toward economic data since a trade deal between China and the U.S. is likely priced in at this point.

China and the U.S. are expected to sign a deal sometime between late March and April. National Economic Council Director Larry Kudlow told CNBC on Feb. 28 the two countries made "fantastic" progress in talks last month.

China has also agreed to bolster its purchases of U.S. agricultural products to try and narrow its trade surplus with the U.S., a sticking point of President Donald Trump. However, the two sides have yet to come to terms on key structural issues like intellectual property theft.

"We doubt this deal will be much of a rally maker," said Donald Straszheim, head of the China research team at Evercore ISI, in a note Monday. "It will not clear the air on US-China relations, and won’t spur now nearly-frozen global companies to restart plans on where and how much to invest, produce, hire and source."

"We still expect a deal 'lite' - advertised as a win but not clearing the air," he said.

Some of the data starting to improve

The good news for investors, however, is some of the economic data is starting to turn around.

Activity in the U.S. services sector rose to 59.7 in February, while new home sales climbed to a seven-month high in December.

Durable goods orders in the U.S., meanwhile, rose 0.4 percent in January to surpass economist expectations. Constriction spending also rose 1.3 percent in January in to mark its biggest gain in nine months.

"What you have to start seeing is what you saw in the service sector in other economic reports. The ISM services index had pared back but then the most recent one was a nice showing. I think you have to see that in manufacturing. That's going to be hard," SlateStone Wealth's Pavlik said. "If you start seeing some of those things, then it takes off a bit of the concern from the global economy."

Not everyone thinks stronger economic data can lead stocks to new highs, however. Paul Schatz, president at Heritage Capital, said stronger economic data could push the Fed’s hand into tightening monetary policy, which could be detrimental to equities.

"The Fed changed the whole landscape," Schatz said. "You do not need unusually strong economic data. What you can't have is cascading lower economic data, but stable economic data is all the market needs to go higher."

"I think we’re in that Goldilocks scenario right now. Stocks had a horrific decline and an amazing rally. Our thesis right now is stocks are in a trading range and will continue sideways for a little bit longer and then the next upward assault is going to take place."



State of the Economy & Tax Help
Author/Anchor: Matt Scott
Date: Mar 6, 2019
Publication: FOX 61
Link to Article



A sit down with Heritage Capital LLC discussing the state of the economy and tax help.


Financial advisers take issue with Democratic plans to tax the rich
Author: Jeff Benjamin
Date: Mar 5, 2019
Publication: Investment News
Link to Article

As tax proposals become increasingly 'loony tunes,' financial planners grow more nervous about how the plans could affect their clients

As Democratic contenders line up for a chance to take on President Donald J. Trump in the 2020 presidential election, the increasingly populist tone of calls to tax the rich is not lost on the financial planning community.

"Those moving further left think there is something fundamentally wrong with capitalism, but this kind of thing has been tried before and it doesn't work," said Dennis Nolte, vice president at Seacoast Investment Services.

Like a lot of financial advisers, Mr. Nolte has clients who fall into the high-net-worth ranks that are being targeted by some of the leading contenders for the Democratic presidential nomination. But Mr. Nolte said his primary opposition to proposals such as a top marginal tax rate of 70% is that they still fall well short of the money needed to finance promises like free college and a government takeover of health care.

"There aren't enough rich people for the 70% tax rate to help," Mr. Nolte said. "The money is in the middle class, so they'll have to go after them as well."

The early campaign proposals being floated include Vermont Sen. Bernie Sanders' suggested 45% tax on estates valued at between $3.5 million and $10 million. The tax would increase to 77% for estates valued at more than $1 billion.

Massachusetts Sen. Elizabeth Warren is proposing a 2% tax on households with wealth above $50 million, and a 3% tax on households above $1 billion.

New York Sen. Kirsten Gillibrand wants a 50-basis-point tax on stock trades and a 10-basis-point tax on bond trades.

Although she isn't running for president, Alexandria Ocasio-Cortez, a freshman representative from New York, is pushing for a 70% tax on income above $10 million. Fellow freshman Rep. Ilhan Omar of Minnesota wants that top marginal tax rate pushed to 90%.

"They are trying to get the attention of a base that will go out and vote for them, and it seems like things have to keep getting more and more audacious in order to get attention," said Matt Chancey, wealth manager at ClaraPhi Advisory Network.

"Obviously, more people in this country are not impacted by taxing the rich because they aren't rich, so the Democrats are trying to get elected by demonizing the high-income crowd," Mr. Chancey added.

Chris Chen, founder of Insight Financial Strategists, admits he isn't familiar enough with any of the tax proposals to take a firm position, but believes "we've had a lightening of the load by the well-off in terms of how they contribute to society."

"The question isn't do they deserve to keep their money, the question is do people who make a lot of money have an obligation to contribute to society accordingly, and I would say as long as we are in a democracy, the answer is yes," Mr. Chen said. "I don't favor communism or socialism, but a different way would be to have tax reform that would cut the loopholes that exist out there."

Kashif Ahmed, president of American Private Wealth, recognizes that the "proposals will continue to get more and more loony tunes," but he also takes offense at Democrats' efforts to fuel class warfare for political gain.

"My wife and I are immigrants to this country, and we consider ourselves to be living the American dream because we came here, and we work very hard to be successful," Mr. Ahmed said. "A lot of people say a lot of things, but you have to consider what is possible. You're talking about confiscating money that people have worked hard for. And the people who are really for this kind of socialist nonsense are people who don't have any money."

Paul Schatz, president of Heritage Capital, takes issue with the populist claim that the wealthy need to be taxed at higher rates because they are not paying their fair share.

"They are preying on the populist theme that the rich can certainly afford to pay a little more," he said. "While that may play well on the surface, it's very anti-growth and anti-capitalist."

The fair share argument is also a matter of perspectives.

According to a study by the Tax Foundation, the top 10% of earners in the U.S. pay two-thirds of the income tax that's collected, while the bottom 50% of earners pay just 3% of all income tax.

"The left will say that they just want to restore tax rates to where they were under Bill Clinton or Ronald Reagan when the economy was humming on all cylinders, but what matters to the economy is the trajectory of taxes as much or more than the rate," Mr. Schatz said. "I have heard detractors say that the Trump tax cuts are going to cause a recession, but it is fiscally impossible to put more money in people's pockets and have that lead to less GDP growth."

Thomas Balcom, founder of 1650 Wealth Management, is concerned about the tone of the discussions, which attack people who have become wealthy.

"Saying wealthy people are not paying their fair share resonates with low-information voters," he said. "The wealthy should be put on notice that if some of these folks get in office, they will be going after them. The socialistic ideas are getting a lot of traction."



As volatility rises, United Capital gives advisers crash course in alts, options
Author: Jeff Benjamin
Date: Feb 25, 2019
Publication: Investment News
Link to Article

Firm wants to add to advisers' tool kit so they can minimize client risk

As volatility surges back into the stock market, United Capital Financial Advisers is arming its troops with more sophisticated hedging strategies, including access to options trading in client portfolios.

Building out its investing platform with recently added strategies from SpiderRock Advisors and iCapital Network, United Capital has spent the past two months hosting two-day symposiums in Dallas to teach advisers ways to use alternative strategies to hedge market risks.

"There's a lot of concern about the increased level of volatility in the markets, so we started looking at some defensive strategies, and ways to be innovative," said Kara Murphy, who took over as United Capital's chief investment officer nine months ago.

By mid-March, United Capital will have trained 120 of its 200 advisers in the two-day symposiums. Some additional training is required for options trading.

Since the first training session during the third week of January, "we've had over $180 million worth of client proposals on the platform, and half have been executed so far," Ms. Murphy said.

In April, the program will be extended to independent financial advisers accessing the United Capital platform through the affiliated FinLife Partners, which combine to manage more than $20 billion.

"The genesis for this was to provide a clearer investment path with a more defined set of outcomes," said Ms. Murphy, who emphasized that options introduce a host of new strategies, including income streams, downside protection, and reduced market exposure.

In addition to the options trading, the United Capital platform has an alternative investing overlay strategy and provides access to a dozen hedge funds.

"I don't care which of our tools a client uses, I just want to make sure it's appropriate and that we have a full set of tools, so we can react to their needs," Ms. Murphy said. "Prior to this, what we offered was pretty straightforward."

Options-trading experts say it should be a part of every adviser's tool kit.

"I'm a big believer in the product, because they can be used by investors and advisers at any level," said John Smollen, executive vice president at the options exchange Miami International Holdings.

Steve Williams, president of Blackstone Wealth Management, said, "Anyone not using options is leaving money on the table."

"It's a good way to hedge your portfolio," he added.

The general appeal of options strategies is that they allow for customized risk exposure and investment objectives in virtually any market environment.

A basic option collar strategy, for example, could be used by a financial adviser to move risk-averse clients toward more equity exposure.

A collar strategy might involve selling a call option for a "strike price" above the market price of an underlying security and simultaneously buying a put option at a below-market price.

The call option piece of the collar will limit the upside gain, but it also provides income to cover the cost of the put option, which limits investment loss.

"You sell calls against a stock you own to create an income stream," Mr. Smollen said. "And a put option is essentially an insurance policy."

However, according to Paul Schatz, president of Heritage Capital, options trading goes beyond plain-vanilla investing, and is not for everyone.

"Very few advisers use options either from a speculative position or for hedging, although the latter is more popular," he said. "I have used options to hedge in the past with varying degrees of success, and they are not part of my normal routine. I prefer the ETF and/or mutual fund route to hedge risk."


This stock-market gauge just hit an all-time high - and that's bad news for bears
Author: Mark DeCambre
Date: Feb 21, 2019
Publication: MarketWatch
Link to Article

Bear markets 'never ever' begin when A/D line is hitting all-time highs: analyst

One widely used signal of the health of the stock market has hit an all-time high, potentially setting the stage for a further rally by U.S. equity benchmarks, say technical analysts.

The New York Stock Exchange's advance/decline line touched an all-time high on Wednesday, as seen in the chart below from StockCharts:

Heritage Capital - StockChart AD Line

Paul Schatz, the president of Heritage Capital, told MarketWatch in a phone interview that "bear markets never, ever, ever begin when the A/D line is making an all-time high."

The Woodbridge, Connecticut-based investment manage also said the A/D line "is historically 90% accurate in predicting large-scale bear markets."

Among technical analysts, the A/D line is the most widely used indicator measuring market breadth and represents a cumulative total of the number of stocks advancing versus the number of stocks declining. When the A/D line rises, it means that more stocks are rising than declining, and vice versa.

The number of stock gaining ground is outnumbering decliners 1,673 to 1,079 on the NYSE and 1,492 to 1,168 on the Nasdaq, while volume in advancing stocks represents 64.8% of total volume on the Big Board and 64.5% of the Nasdaq's total volume.

The bullish A/D reading comes after stocks extended a rebound that has taken the major equity benchmarks to their highest levels of 2019, after suffering the worst declines on record for trading session immediately before Christmas.

The Dow Jones Industrial Average DJIA, +0.70% is up 18.8% from its Dec. 24 low, the S&P 500 SPX, +0.64% also has gained by about 18%, the Nasdaq Composite Index COMP, +0.91% has advanced 21% from that nadir.

Declines had been attributed to the a combination of mounting fears of economic disaster emanating from China’s trade spat with the U.S., and worries that the Federal Reserve was moving too aggressively in normalizing monetary policy and creating ripples in financial markets.

Now, those issues have abated with Wall Street investors expecting that Beijing and Washington will soon strike a tariff pact, even if an imperfect one, and the Fed has declared a wait-and-see approach to raising borrowing costs for investors.

"Week by week, the bearish case is crumbling; everything that the bears were hanging their hopes on is falling apart," said Schatz. "It doesn’t guarantee that stocks continue to rip higher, but it insulates the stock market against a large-scale decline." he said.

J.C. Parets of the All Star Charts blog also is sanguine about the record A/D reading. "This expansion of upside breadth continues to point towards higher stock prices from any sort of intermediate-term perspective," he wrote on Wednesday.

To be sure, worries about the durability of the current rally persists, particularly given the apparent speed at which stocks snapped back from ugly lows.

Skepticism about the current rebound is partly rooted in the belief that stock gains have renewed worries about stock valuations as earnings aren’t expected to shine the coming periods. The S&P 500's price-to-earnings ratio, a popular measure of stock values, over the next 12 months is at its highest since October, at 16.27, after touching a low of 13.59, according to FactSet data (see chart below):

Heritage Capital - FactSet Price to Earnings Ratio chart
Source: FactSet

Moreover, there is also concern that the more the markets improve on the back of a U.S.-China trade agreement, the more likely the Fed may be to resume its apparent pause in interest-rate hikes, which could potentially fuel a fresh rout.

"Bulls hope a surprisingly strong U.S.-China trade breakthrough keeps consensus earnings estimates from drifting down as 2019 progresses just like the tax cuts kept profit forecasts buoyant in 2018. The problem is that, even if that happens, at 16.5x 2019 CY earnings, large-cap stocks appear fairly valued given only 4.2% consensus 2019 EPS growth forecasts," wrote Alec Young, managing director of global markets research at FTSE Russell, referring to the late-2017 tax cuts signed into law that offered a fillip to corporations.


Americans — particularly millennials — are alarmingly late on car payments
With: Aarthi Swaminathan
Date: Feb 18, 2019
Publication: Yahoo! Finance
Link to Article



A record seven million Americans are more than 90 days late on their auto loan payments, and millennials are clearly leading delinquency rates, according to a report by the New York Fed.

The NY Fed found that the number of new auto loans and leases appearing on credit reports in 2018 reached a new peak - the highest level in the 19 years they have monitored the data - at $584 billion.

Looking at the number of auto loans in serious delinquency, the researchers noted that there was a "sharp worsening in the performance of the loans held by borrowers under 30 years old between 2014 and 2016."

And as seen in the graph below, borrowers between the ages of 18 and 39 - Pew Research identifies millennials as anyone born between 1981 and 1996 (ages 23 to 38 in 2019) - have the worst delinquency rates as compared to other demographics.

InvestForTomorrow

The researchers said that overall, the end of 2018 saw "more than a million more troubled borrowers than there had been at the end of 2010," when the overall delinquency rates were at their worst on record. Auto loans have also surged by almost 35 percent since the Great Recession according to additional data.

"The substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market and warrants continued monitoring and analysis of this sector," the report concluded.

Delinquencies concentrated in the southeast

A Yahoo Finance analysis of the NY Fed data revealed that many of the higher delinquency rates are concentrated in the southeast, with states like Alabama, Georgia and Mississippi looking at the highest levels.
InvestForTomorrow

Vicious cycle of low credit ratings

Millennials with poor credit may be a key contributor to the trend.

"The strongest correlation is credit rating," Bankrate.com's chief financial analyst Greg McBride told Yahoo Finance. "Those with poor credit ratings have much higher delinquencies. It's much more a function of credit rating than age."

McBride explained that younger people don't have a long and established credit history, which results in them being classified as non-prime borrowers in addition to depriving them of access to financing options from credit unions or banks.

"Borrowers with credit scores less than 620 saw their transitions into delinquency exceed 8 percent in the fourth quarter," the NY Fed report stated, "a development that is surprising during a strong economy and labor market."


Industrial stocks lead market in broad rally
Author: FOX Business
Date: Feb 13, 2019
Publication: FOX Business - Charles Payne
Link to Article



Heritage Capital President Paul Schatz and Capital Wave Forecast editor Shah Gilani on how industrial stocks are leading the market rally.


Emerging markets are the most crowded trade for first time: Survey
Author: FOX Business
Date: Feb 13, 2019
Publication: FOX Business - Charles Payne
Link to Article



FBN’s Charles Payne and Heritage Capital President Paul Schatz on Bank of America Merrill Lynch’s February fund manager survey, which showed that fund managers considered being long on emerging markets was the most crowded trade.


Twitter Q4 earnings beat but guidance disappoints
With: Adam Shapiro, Julie Hyman
Date: Feb 07, 2019
Publication: Yahoo! Finance
Link to Article



Social media giant Twitter beat 4Q earning expectations but provided disappointing guidance for fiscal first quarter. Yahoo Finance's Emily McCormick reports and Aegis Capital Managing Director Victor Anthony joins Adam Shapiro and Julie Hyman over the phone. Heritage Capital President Paul Schatz and Yahoo Finance's Ethan Wolff-Mann also join the discussion.


BB&T strikes deal to buy SunTrust- largest U.S. bank merger in a decade
With: Adam Shapiro, Julie Hyman
Date: Feb 07, 2019
Publication: Yahoo! Finance
Link to Article



BB&T Corp. agrees to buy SunTrust Banks Inc., creating the sixth largest retail bank in the United States. Heritage Capital President Paul Schatz joins Yahoo Finance's Adam Shapiro, Julie Hyman and Ethan Wolff-Mann to discuss.


Semiconductor gains could give stocks ‘the all clear'
With: Alexis Christoforous
Date: Jan 29, 2019
Publication: Yahoo! Finance
Link to Article



Paul Schatz, Heritage Capital LLC President, says that if semiconductors can hold on to their gains and add to them in the next couple of weeks then “stocks may get the all clear green light for the next couple of months.” Yahoo Finance’s Alexis Christoforous speaks to him.


Top financial resolutions for 2019
With: Samantha Miller
Date: Jan 22, 2019
Publication: WTNH - NEWS 8
Link to Article



(WTNH) - If re-working your finances is part of your new year resolutions, finding a place to start might be overwhelming. Financial Expert Paul Schatz, President of Heritage Capital L.L.C., shares the money goals that should be at the top of your list this year.

1. Create, update and review your budget

2. Create emergency fund

3. Review 401K contribution

4. Rebalance investment accounts

5. Don't run from the stock market

6. Check credit report

7. Create debt service plan

8. Review credit card rates

9. Bundle insurance

10. Bundle charitable contributions

11. Review beneficiaries

12. Refinance your mortgage

13. Photograph and inventory contents of your home

14. DIY or hire a professional advisor



US stocks rebound off lows amid trade concerns
Author: FOX Business
Date: Jan 14, 2019
Publication: FOX Business - Charles Payne
Link to Article



Heritage Capital President Paul Schatz, Ancora managing director David Sowerby and S&P Investment Advisory Services’ Erin Gibbs discuss the state of the U.S. stock market amid global growth concerns and President Trump’s trade war with China.


Finance tips for the end of the year
Author/Anchor: Tim Lammers
Date: Jan 14, 2019
Publication: FOX 61
Link to Article



AS THE PARTIAL GOVERNMENT SHUTDOWN CONTINUES. WE WANT TO TALK ABOUT YOUR FINANCES. JOINING US TO TALK ABOUT IT IS THE PRESIDENT OF HERITAGE CAPITAL LLC PAUL SCHATZ

IT SEEMS LIKE STOCKS HAVE BEEN ON A GIANT ROLLER COASTER FOR MONTHS.

WHAT`S YOUR OUTLOOK FOR 2019?

SHOULD THE AVERAGE INVESTOR AVOID STOCKS?

MY 401K SOARED IN EARLY 2018 AND WENT DOWN HARD TO CLOSE THE YEAR? SHOULD I STAY THE COURSE OR DO SOMETHING DIFFERENT?

ARE THERE OTHER THINGS TO INVEST IN BESIDES JUST STOCKS?

I KNOW THE US STOCK MARKET DID A WHOLE LOT BETTER THAN THE REST OF THE WORLD, WHAT`S GOING ON AROUND THE GLOBE?

WHAT KEEPS YOU UP AT NIGHT REGARDING THE ECONOMY AND FINANCIAL MARKETS? WHAT SHOULD THE AVERAGE INVESTOR LOOK OUT FOR?

WHAT`S YOUR TAKE ON THE ECONOMY FOR 2019? WILL THE JOB MARKET GET BETTER? HOW ABOUT WAGES?

HOW IS THE CT ECONOMY DOING? (MY ANSWER WILL BE NEGATIVE)

ANYTHING WE SHOULD BE WORRIED ABOUT? (MY ANSWER WILL BE A RESOUNDING YES)

PEOPLE HEAR ALL THE TIME THAT THE FED DID THIS AND THE FED DID THAT. DOES IT MATTER TO THE AVERAGE PERSON? THE AVERAGE INVESTOR?

WHAT DO YOU THINK THE FED WILL DO IN 2019?


Theresa May Rules Out a No-Deal Brexit
With: Julie Hyman
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



Yahoo Finance's Adam Shapiro, Julie Hyman, Brian Sozzi, and Alanna Petroff join Heritage Capital President Paul Schatz to discuss Brexit.


The 10 most in demand skills of 2019
With: Julie Hyman
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



LinkedIn recently analyzed hundreds of thousands of job postings for 2019 and found that employers are looking for workers with both soft skills and hard technical skills. Among the top soft skill is creativity and for the top hard skill is cloud computing. Yahoo Finance's Adam Shapiro and Julie Hyman discuss with Brian Cheung and Paul Schatz.


US, China officials begin trade talks in Beijing
With: Julie Hyman
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



The US and China resumed trade talks ahead of March deadline on trade. Yahoo Finance's Julie Hyman, Adam Shapiro, and Heritage Capital President Paul Schatz discuss with China Beige Book International CEO Leland Miller.


These are the 10 biggest risks in the world, according to Eurasia Group
With: Julie Hyman
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



Eurasia group released a report of the top 10 biggest risks that could impact the world in 2019. Yahoo Finance's Julie Hyman, Adam Shapiro, Brian Cheung and Kristin Myers discuss with Heritage Capital President Paul Schatz.


Eli Lilly to buy Loxo Oncology for $8 billion
With: Adam Shapiro
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



In a bet on cancer drugs Pharam giant Eli Lilly announced a deal to buy Loxo Oncology which creates drugs for cancers taht can be identified with genomic testing. Yahoo Finance's Julie Hyman, Adam Shapiro, Emily McCormick, Brian Sozzi and Paul Schatz of Heritage Capital discuss.


Estimates of the gig economy gone wrong
With: Adam Shapiro & Julie Hyman
Date: Jan 07, 2019
Publication: Yahoo! Finance
Link to Article



Two leading experts of the 'Gig Economy' say their estimates of its impact were way too high due to spotty data and the recession of a decade ago. Yahoo Finance's Adam Shapiro and Julie Hyman discuss with Brian Cheung and Heritage Capital President Paul Schatz.


Market downturn puts spotlight on active management
Author: Jeff Benjamin
Date: Jan 02, 2019
Publication: Investment News
Link to Article

One of the best ways active managers can earn their money in a down market is by holding cash, something index funds can't do

The momentum toward passively managed index investing is expected to lose some steam as the volatility in the financial markets shines fresh light on the benefits of active management.

It is as cyclical as the markets themselves, and a lot of financial advisers are already making asset-allocation adjustments to bring active managers off the bench as the stock market heads south.

"No question that this downturn in the market will favor actively managed strategies going forward," said Dale Wong, president of Missio Investment Management.

"Greater volatility and dislocation in a sharp downturn typically affects all equities, even those companies whose future prospects for growth and earnings are much more attractive," he added. "This creates dislocations in the market that enhances opportunities that active managers can take advantage of with greater likelihood of asymmetrical returns over a three-to-five-year investment horizon."

A decade-long bull market for stocks has made an easy case for riding along in low-cost index funds, but the spike in volatility over the past three months is triggering some altered viewpoints.

The S&P 500 Index declined by 4.38% last year. But the number that is getting more attention is the 13.52% decline during the fourth quarter.

Meanwhile, actively-managed large-cap growth funds, as tracked by Morningstar, declined by an average of 2% last year, though they were down 15.42% in the fourth quarter.

But inside those broad averages are such extremes as a 17% full-year return by the Fidelity Advisor Series Growth Opportunities Fund (FAOFX). The $680 million fund was down 10.4% in the fourth quarter.

The best-performing large-cap growth fund in the fourth quarter was the $265 million Madison Investors Fund (MNVRX), which was down 7.63%.

"To me, active management is risk management," said Barry Mandinach, executive vice president at Virtus Investment Partners.

"When people buy index funds, most of them don't know what they're giving up in exchange for the low fee," he added. "They're taking on a valuation- and quality-agnostic approach to investing. And that's like driving a car with no brakes, which is fine if you're only going uphill."

One of the best ways active managers can earn their money in a down market is by holding cash, which is something index funds are not able to do.

"In times of market volatility and selloffs, active management is getting paid a premium to keep you from losing too much ground," said Todd Rosenbluth, director of mutual fund and ETF research at CRFA.

"They can go to cash, they can raise cash, and they can buy on the dips, whereas index funds have to track the index," he added.

Dennis Nolte, vice president at Seacoast Investment Services, said cash management is the secret weapon for most active managers.

"If a fund holds cash and is highly correlated to the S&P 500, it'll outperform during down markets," he said.

While index investing isn't yet free, it is dirt cheap, which means most active managers must gain at least 100 basis points over an index just to cover the management fee differential.

But the tradeoff, from an adviser's perspective, is the ability of an active manager to buy low during periods of market volatility.

The flipside of being able to go to cash is that active managers suffer a "cash drag" during bull market periods, which is another reason index funds are more competitive in bull markets.

"Active mutual funds typically trail in the strongest of markets and perform better and better as that tails off," said Paul Schatz, president of Heritage Capital.

"The longer the stock market becomes challenging, the more the active fund manager takes measures, whether right or wrong," he added. "One thing they certainly do is run with higher cash levels. Just that alone can help reduce fee drag. Active managers will also often reduce beta in a portfolio to reduce risk if they don't want to raise cash."




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