Crypto market is in a ’greedy’ and ‘euphoric’ period: Heritage Capital President

Paul Schatz, Heritage Capital President, joins Yahoo Finance Live to discuss outlook on the bond market and cryptocurrency.

Video Transcript

I was actually going to stick around for our next segment as we welcome in Paul Schatz President of Heritage Capital. Paul always good to see you. I understand that you have been selling lately more than you have been buying. I am curious why you're not buying on some of the dips we've been seeing and what have you been selling?

PAUL SCHATZ: Always good to be with you. It's a lot in that question. So number one, I really struggled to find stocks and sectors that fit into our rationale to buy. It's very easy to buy something that's going straight up. Doesn't take a genius to do that. I'm just not comfortable doing it. I'm doing this 32 years and I've never been rewarded over the long term, by just piling in because something is going up, up, up.

So, yeah we've sold mostly in tech frankly. In the last month we sold Microsoft, we sold Google. There was clearly more than that. We've pared back some Apple. Most important is that the market's been tired the last couple of weeks. An individual investor can just look at market reaction. You guys just did a story on GM. I think it's up 3% ish, but given the news and given the stock, you know GM and Google and the really that the tech arena-- obviously GM's auto, but they've responded poorly to super good earnings. Earnings have been off the charts, you know generationally amazing and sellers are coming in. That's the classic sign of a tired market. Doesn't mean the bull market is over but it certainly means stocks are tired. It's much easier for me to sell into that then bad news. I don't want to sell on the bad news after stocks have already gone down.

On the buy-front, I look for stocks that are about ready to begin a leg higher, not that have gone like this. So they've been few and far between. But I have found bargains, you know we've added two positions, in Echo labs, ACL we own that. We bought the Mexican cement maker CX. We bought Perego which is the old, it's been beaten up so many times. It's our first foray into it. And we bought ACCO which is office products player. They're all-- they're all-- and also there are special situations, but there are certainly not high momentum stocks that are turning around and crashing now.

- Well, Paul I want to shift directions a little bit and talk about the bond market. Because the Treasury Department just issued its quarterly refinancing statement today and they're saying that debt limits are going to return in August after a two year suspension. Also that the toolkit could be exhausted much more quickly than before. In addition, there are some concerns about Treasury market liquidity around this potential debt ceiling event and we've been through this many times before. What are your thoughts?

PAUL SCHATZ: The Treasury market is a problem. And if you look at the super long term, look no further than the Fed, their fingerprints and DNA are all over the Treasury bond market. That's why we've had lower vol-- lower liquidity, less players less money in it, and more volatility. There is no easy solution for it if the Fed wants to have their super heavy hand in the Treasury bond market. And if you run-- want to run these insanely, absurdly, unfathomably high budget deficits they have to get funded, you've really changed the balance of the free market. The Treasury market is not a free market. That's part of the problem.

So you've got volatility ups and downs and you've got spreads. There are two different issues. Each and every time there's an issue in the Treasury bond market the powers that be-- and will call it the Fed and Treasury have to become even more involved in the markets to tamp it down. There's no political will to let the markets function as they're supposed to. That's the biggest problem.

So what happens you've got the banks taking on less risk. Banks are the primary dealers they should be in there. But with the Fed's heavy hand, the banks are kind of squeezed out. You've got less foreign involvement and frankly foreign players are the least price sensitive. So you've got less of them, you've got more people trading electronically, more proprietary firms involved. All this to the average investor like what did he just say, here's the bottom line if the average person. When you've got a heavy hand and the normal flows of capitalism leaving, that leads to these temporary dislocations that scare the heck out of investors.

- All right. Paul, I want to ask you before we let you go about Cryptocurrency. It's something that we've been chatting about quite a bit. It's so interesting this market. All right. It feels like there's a lot of gamblers out there. If it's not GameStop now it's Dogecoin.

How should investors be approaching this? How should they be approaching Cryptocurrency? I have so many friends calling me, asking me, should I buy Dogecoin? It's a question I refuse to answer. So I'm going to throw that over to you. Investors are looking at this trying to seek some of these high growth options. How should they be approaching this right now?

PAUL SCHATZ: Super. Super carefully. Caveat emptor. My 16-- my 16-year-old son Ryan talked to me about Dogecoin when it was like $0.08 or $0.10 and I told him I'm going to have him committed. Well, he should had me committed because he had it right in hindsight. Here's the problem. When the game of musical chairs stops and you don't have a plan to play defense, stuff like Dogecoin-- this I'm telling you and people say I'm a-- you're OK boomer. That's the great answer I get. But I was around the dotcom bubble of news 32 years. Human behavior and emotion never changes. You go from greed, and euphoria to despondency, despair and fear. And right now in the Crypto market overall we're in that super greedy euphoric period. If the average investor wants to dip their toe in, they should do it with a small percent of their portfolio.

I get the question, Christine every single day from prospects, from the media, from clients. What about Cryptos? Personally, the advisors haven't found a great way operationally to safeguard client monies from fraud and to thoughtfully use Cryptos. And I'm sure some advisors are going to tell me I'm wrong. It's OK. I'm going to wait until there are ETFs, which are all registered with the SEC right now awaiting approval. And I'm going to wait till they come out we could see how the markets treat those and trade those. But I'm not personally interested with client monies of trying to find a solution that's not really thoughtful and in the client's best interest.

So I think, you know clearly Bitcoin is the granddaddy and you go all the way down into Doge and I'm sure there are others that are being created. I just think clients have to be careful just because prices are going up just like with eyeballs over earnings in 99, 2000 doesn't mean this is sustainable and the entity is going to survive. So people should be super careful, stick with the big boys, wait for an ETF to come out. You've got better price discovery. Reregulated OBM exchange. It may not suit people who are like Cryptos because of their anonymity, but we already know the IRS has on 1,040 they asked about your Crypto transaction. So the IRS is clearly watching people should be careful.

- Well, we'll see if you have a change of heart. The other day I had Kevin O'Leary on and he said he finally-- he called it garbage once upon a time, Bitcoin, he's now allocating 3% of his portfolio to the Cryptocurrency. Paul Schatz of Heritage Capital, always good to see you.