“Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves.” – Peter Lynch

From the Desk of Joe Rollins

Probably a great deal of the investing public has never heard of Peter Lynch. During my formative years of investing, he was the most famous investor of all time. Peter Lynch ran the Fidelity Magellan Fund for 13 years with an average gain of 29.2% and had unparalleled success. Even in the stock market crash of 1987, Fidelity Magellan Fund had a positive return. I think his advice above is very important today as we face a recovering economy and an earning explosion.

I became curious as to why so many investors are unwilling to invest more money during this time, so I did an informal survey to find out exactly what is bothering people and preventing them from investing. I got many responses, but most of them centered around the potential increase of inflation, the wild and crazy spending in Washington whether the economy is actually recovering, a potential increase in interest rates by the Federal Reserve, and a basic misunderstanding of corporate earnings.

Ava posing with her 10th birthday celebration signs

I have decided to address these issues, so my readers understand exactly where I stand. I also want to give you information regarding the recovery of the economy that is in controversy. It is so absolutely crystal clear to me that the economy is exploding on the upside, that it is fascinating to me that so many people continue to question it. Also, I want to discuss general investing policy and how that affects your potential retirement. I always like to quote the famous investor Warren Buffett, when he said “Do not save what is left after spending, spend what is left after saving.” I intend to cover all those subjects and hopefully convince investors that many of the fears expressed above are either temporary or completely misplaced.

Before I do so, I need to reflect on the performance of the financial markets for the month of May. As you know the year 2020 was an extraordinary year on the upside for the markets. It has also continued into 2021 with the markets continuing to rise. One of the oldest sayings on Wall Street is, “Sell in May and go away.” I think if you follow that advice over the summer months, you may miss a good opportunity.

The Standard & Poor’s Index of 500 stocks was up 0.7% in the month of May and is up 12.6% for the year 2021. The one-year performance on this index is an extraordinarily high 40.3%. The NASDAQ Composite was down for the month of May 1.5% and is up 7% for the year 2021. The one-year performance on this index is a 45.9% increase. The Dow Jones Industrial average was up 2.2% during the month of May and is up 13.8% for the year 2021. The one-year performance for the Dow Industrial is also an outstanding 38.6%. Just for the sake of comparison, the Bloomberg Barclays Aggregate Bond index was up 0.2% in May, but is down 2.5% in the year 2021 and is also down for the one-year performance at negative 0.7%.

Kari and Adam’s engagement photoshoot before their June wedding

If you compare the three major market indexes, which were up 38% or higher over the last year, you can see that the bond index was a major disappointment, reflecting a negative return for the one-year period ended May 31, 2021. One of the major reasons for concern for investors is that they believe that inflation will soon impact virtually every item we purchase and every commodity that is essential for the everyday budget. There is no substantial evidence that inflation will impact the economy this quickly. In fact, if you go back and review the history of inflation, you will realize that it takes many years to actually affect the economy in general.

I was here in Atlanta during the 1973 oil crisis. Most people do not even remember that the reason that crisis occurred was because OPEC, “Organization of the Petroleum Exporting Companies,” decided to withhold oil from all the countries that supported Israel during the Yom Kippur War. Basically, the OPEC countries decided that they would not sell oil to the United States during this time period and correspondently, the U.S. suffered through a substantial decline in its oil imports and a substantial increase in price. During that time, the use of oil affected so many different aspects of the American way of life it forced prices up almost immediately. The price of oil went up almost 300% from $3/barrel in the U.S. to nearly $12/barrel.

I can vividly remember standing in line to purchase gasoline during that very difficult time. I also recall the dramatic increase in the price of a gallon of regular gasoline which rose 43% from 28.5 cents a gallon in May 1973 to 55.1 cents in June 1974. Just looking at the above numbers you would think that inflation would impact the United States almost overnight. But history reflects something else.

It wasn’t until the late 1970’s (6 years later) that inflation really became a serious financial issue for the American economy. Yes, we had inflation prior to that time and went through ill-placed actions by the government to hold down prices, which was unsuccessful. However, it really got out of control during President Jimmy Carter’s years, when double digit inflation was commonplace. The point of this scenario is that it takes years to impact the economy with significant inflation. I think we are seeing that reflected today. Even though prices are moving up, inflation in the economy is almost assuredly an event that will be years from now before it will affect and hurt the U.S. economy. It even looks like some of the prices have already started to moderate.

You also see it in the words of the Federal Reserve members that are most influential in controlling interest rates. The most important regional bank in the Federal Reserve is the New York Federal Reserve. Its President, John Williams, recently said we are “Still quite a ways off from maintaining substantial further progress.” Basically, what he quoted was a reflection of Federal Reserve’s Jerome Powell’s many statements saying that the economy has yet to overheat and, therefore, any changes by the Federal Reserve at the current time would be unwarranted.

There is also a clear misunderstanding of how inflation impacts financial markets. There is no question that if the Federal Reserve started to increase interest rates dramatically, it would start to hurt stocks. But using the Federal Reserve’s own words, that may be years away. It is, however, already dramatically hurting the performance of bonds. As noted above, bonds for the one-year period had a negative rate of return. Bonds are not a good investment right now. However, the effect on stocks is much more positive.

Morgan seeing the waterfall while hiking at Roswell Mill

If you envision a company that has inventory and inflation had increased the prices of that inventory, they have instant gain with an increase in the underlying products that they sell to the public. This instant increase in prices generates future higher profits for the company. In addition, the assets owned by the company are likewise increased in value due to inflation. Therefore, the machinery, equipment and real estate also have a higher valuation prior to the increase in inflation. While these increases in valuation do not necessarily increase the value of the stocks, they dramatically increase the cost for a competitor to come in and compete with the company itself. This increase in fair market value of the underlying assets is very much a positive for corporate earnings. Why some question that runaway inflation would have a dramatic negative effect on the economy, it appears at the current time that this economy is literally “on fire” with the Federal Reserve waiting for future increases for future information to make any change in interest rates.

There was a short-term sell off of the stock market last week when the Federal Reserve announced that they would be selling some of their corporate bonds that they have accumulated during the crisis. However, what they did not specifically mention was that they would not be selling any of their Treasury bonds. In fact, the Federal Reserve currently continues to buy Treasury bonds on a regular and continuous basis. Most people are confused why the 10-year treasury has not moved significantly above the 1.6% rate when reported inflation is well above 2%. There is a specific reason why that rate is continuing to be steady. With the Federal Reserve basically buying up all the excess Treasury bond issued it is unlikely that rate will move dramatically without the Federal Reserve backing off. At the current time, the Federal Reserve announced that it is not their intention to back off on these purchases prior to 2023. Therefore, if your major concern is that inflation would impact the value of your stocks on a current basis, that is misplaced.

Danielle, Reid and Caroline smiling for this sweet shot

One of the items that always perplexed me was why people do not save more. I get the answer as quoted above by Warren Buffett that they just don’t have any money left over after their monthly expenditures to save. What I have seen over my 50 years in the business, young couples come out of college and both begin working simultaneously and make a good income. Over time they just increase their expenses so that their monthly budgeting equals basically their income. When asked why they do not save more they reflect upon all the expenses and indicate there is nothing left to save.

I often question why people tell me they only put in their 401(k) plan exactly what the company matches. Since a 401(k) is, under current tax law, the absolute largest tax deduction a young professional could get, you wonder why they do not participate more. In fact, in most cases, virtually all workers should attempt to maximize their 401(k)’s on a regular basis. If you look at a chart where you start to save early in life and continue to save over time, a financially secure retirement is almost guaranteed. However, if you wait until later in life the difficulty to accumulate these amounts are enormous.

As we all know the stock market on average goes up 9% a year, yet too many people are trying to time the market and ignore that proven fact. If you look back to March 2020 all the people that sold out of the market during that time period were the losers in a financial market that was legendarily high. Take a look today at all of the cash sitting in checking accounts. It is now estimated that over $3 trillion is sitting uninvested in money market accounts today. We all know that money markets are paying virtually zero interest and CD’s are paying almost zero. As noted above, over the last one-year period, the S&P 500 is up 40% and money market accounts are up 0.1 of 1%. You do not have to be a Philadelphia lawyer to understand the value of being invested as compared to being in cash.

The Schultz family in their Sunday Best

Last week the Commerce Department reported that May hiring increased by 559,000 employees. It also announced that the unemployment report dropped from 6.1% to 5.8%. However, with those numbers came out the stark reality that there are still 9.3 million people in the United States that are unemployed and potentially available to work during the month of May. One of the major components of inflation is job-related wage increase. It should be evident to everyone that hiring is almost at a standstill in America because so many workers refuse to go back to work. There is no shortage in employees, there is just a shortage of people wanting to work. Virtually all industries that pay minimum salaries are searching for employees to fill those positions. One of the major reasons quoted is that the extra $300 a week in Federal unemployment insurance is causing employees not to want to work, and to stay home and collect benefits. It has already been announced that 25 states will eliminate this $300 increase, effective immediately. The President also announced that these increases will stop immediately in September of 2021. The economic effect of stopping these increases in Federal unemployment should be obvious. If only half of the people currently unemployed now take jobs, since unemployment is unprofitable, the economy should pick up even further. These are people paying taxes and consuming once again to help the economy grow.

People ask me all the time how I knew and how I was correct regarding the absolute turn around in the economy during the early parts of 2021. Basically, I look at the numbers every day to determine whether the economy is moving ahead or sideways. But if you want to hear information that is more down to earth and easily understood, look at the case of Las Vegas, Nevada. For the month of April their weekend occupancy in their hotels was 83.5%. In January, that weekend occupancy was 48%. During the month of April there were 2.9 million air passengers coming into Las Vegas. In the month of January there was 1.5 million. Most importantly, during the month of April the unemployment in Nevada was 8%. During April of 2020, the unemployment in Nevada was 29.5%. As you can see there is a real-world increase in the economy happening overnight.

I happened to fly to Florida over the Memorial Day weekend and can report that the airports were completely crazy on Memorial Day. There were lines to get into restaurants lined up down half the corridors with passengers. There was a shortage of rental cars in both markets and the airport appeared to be exactly at the same level of capacity that it was prior to the pandemic. I flew quite a bit during the pandemic and can report walking into Tampa International Airport at seven o’clock at night and there not being one single passenger other than me. This most recent trip, the airport was virtually at capacity of people trying to catch flights out of Tampa.

DeNay visiting the incredible Van Gogh exhibit

Another common reason I hear people will not invest in the market is that the market is too expensive. One of the things I that I try to do with potential investors is ask them how they have determined that the market is too expensive. Well basically they read what is quoted in major publications and believe those facts and figures to be accurate. But one of the things misunderstood by the investing public is that if the price of stocks are at a certain level today, but earnings continue to go up, doesn’t that mean that prices will be cheaper in the future? As I have often said in these postings, the most important component in pricing stocks is the level of earnings of these stocks. At the current time, earnings are exploding to the upside and the public does not seem to get the point. It is now being forecast that earnings from the period from May through December of 2021 will increase a dramatic 23% higher from where they were in May. If earnings continue to increase, as I suspect they will, stocks will continue to get cheaper. Why would you not participate in this increase when we absolutely know it is occurring all around us?

One of the major concerns of the investing public has been the pandemic and the spread of COVID. Maybe you haven’t noticed that COVID infections are down close to 90% of what they were six months ago. In the entire Unites States yesterday there were only 11,000 new cases. Deaths from COVID are falling dramatically and now average around 400 a day as compared to several thousand six months ago. If we could encourage the rest of Americans to get vaccinations, heard immunity could be reached this summer. Already 63% of Americans over the age of 16 have now been vaccinated at least one time and the number of vaccinations is going up roughly at one to two million a day. It is very clear that the vaccinations are stymieing the spread of this terrible virus. Correspondingly, as cases go down the public is out again spending all their accumulated resources. Given the fact that they have not been able to spend over the last 14 months, you are seeing an explosion in hotels, rental cars and virtually any type of lodging on the beach.

This upward explosion of the economy has occurred without the new Federal money that is being discussed to spend in Washington. At the current time, Congress is considering an additional $4 trillion of Federal stimulus in the way of infrastructure type changes. This would provide funds for additional roads, highways, bridges, dams, etc. While all those things are clearly needed, dumping all that money into an already overheated economy will only make the shortage of commodities worse over the short term. It is my opinion that Congress will go slow with these increases, and we will not see them implemented until much later in the year 2021.

Jodi Dufresne, 36-year client, enjoying her horse on a spring day

So where do we really stand on the economy and exactly what does the future hold? While no one can truly predict the future, we do have some evidence of exactly where we stand. The Federal Reserve of Atlanta makes a projection of future GDP growth based on their internal models. Currently they are forecasting an increase of GDP for the second quarter at 10.3%. The entire Federal Reserve is forecasting the economy in the U.S. for the entire year of 2021 to increase above 7%. If we were to end the year with a 7% increase in the economy that would be the best yearly increase since the Ronald Reagan years. There is no question that the economy is coming back in a big way. We all see it every day around us and just like I predicted, the increase will be substantial and long-term.

In circling back to the original reason for writing this blog, I am questioning why people will not invest all the cash they are sitting on. After a dramatically higher year in 2020 and a great start to 2021, everyone should consider investing their cash that is earning nothing for long-term results. We now know that the three components of higher stock prices are firmly in place. The three components of higher stock prices are interest rates, the economy and corporate earnings. The chairman of the Federal Reserve, Jerome Powell, has confirmed that he has no intention of restricting the economy or increasing interest rates prior to 2023, which is a cool 18 months from today. We know based upon the information presented above that the economy is totally on fire. Businesses today are dealing with the exact opposite that they dealt with over a year ago. Corporate America is trying to hire employees, but they cannot do so. Everywhere you look, employers are seeking employees but cannot fill those positions.

Josef Martinez, Morgan and Kari catching a Braves game

These trends are a clear indication of the strength of American corporations since they are now hiring rather than laying off employees. Also, we know that corporate earnings are dramatically increasing and even the pros are forecasting an increase in earnings in 2021 of greater than 20%. There are many forecasters that think in the last half of 2021, corporate earnings will be even higher. It is a fairly conservative forecast that the earnings will be higher given all of the new employees that have gone on the payroll in the early 2021. In addition to the prior Federal stimulus, if the government continues to give out free money to Americans and businesses, we expect the economy to grow even faster and bigger.

So, my forecast for the future looks like an economy that will continue to grow, earnings that will continue to increase and interest rates that will be stable. That is the trifecta of positive economic data that will lead to higher stock prices. There is absolutely no question that the concern of the Federal deficits will increase inflation. However, my assumption is based on history that the increase in inflation is years away rather than months away. We also know that eventually the Federal Reserve will have to increase interest rates to slow down an overstimulated economy. Once again maybe years from now, but not months from now. As we go forward to the summer and more and more Americans become vaccinated and corporate travel and recreational travel doubles, you will see corporate profits unprecedented in modern times. All these positive economic effects will have a negative effect on bonds, but a positive effect on stocks.

There has been a dramatic change in the investing of growth stocks in the last part of 2020 and the first five months of 2021 as there has been a transfer to value stocks due to the turnaround in the economy from recession to expansion. However, do not give up on the growth segments of investing. The growth companies such as the large tech companies are recording profits unprecedented in American commerce. All of the positive economic events represented above will only increase those profits, not decrease them. While values stocks are certainly rallying in the first part of 2021, I see a shift back to growth this summer and an expansion of growth for the rest of the year.

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately. However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

The #1 Lesson (Re)learned from the COVID Correction/Recession

Discipline might be the most important and most difficult principle for investors to follow. While the coronavirus pandemic progressed, financial markets experienced unparalleled volatility as the world faced economic shutdowns designed to keep the virus from spreading.

A natural and justified human reaction to the uncertainty is to protect and preserve the resources you have. While this might be the right strategy in some respects, staying disciplined and invested is consistently the most productive solution for long-term savings like retirement accounts which are designed to provide decades long retirement income stream.

The S&P 500 experienced the best 50 trading days in history as markets recovered from the March 2020 swoon. The S&P 500 increased by a historic 37% from late March into June. This was immediately preceded by the sharpest correction ever, falling 35% late February into March. Missing out on those 50 best days ever, or even a few of the really powerfully positive days, could have put your long-term retirement plans in jeopardy.

The chart below illustrates the intra-year declines experienced during each of the past 20 full calendar years. In 11 out of 20 years, the markets fell by at least 10% at some point during the year.

Source: Morningstar Direct, as of 12/31/2019. Indexes are unmanaged, do not incur management fees, costs, or expenses, and cannot be invested indirectly. Past performance does not guarantee future results

Financial markets are nearly impossible to time exactly right because investor psychology is unpredictable. Additionally, the financial markets typically recover from a shock or economic setback before the data suggests the worst is over. For instance, stock markets bottomed in March of 2009 in the wake of the housing crisis before recovering over 60% by the end of 2009 – even as job losses continued, foreclosures accelerated, and real estate prices continued lower.

During a severe correction or crisis, it’s not uncommon for us to receive client requests to sell investments and then wait for the situation to stabilize and reinvest. There are a few problems with this strategy: First, when we get this request, the markets have almost assuredly already reflected at least some of the uncertainty, so we are selling after some or most of the decline has already been suffered. Second, if you are lucky enough to not be selling at the bottom, there is little chance investors are going to be courageous enough to reinvest as markets continue falling. There is, however, a good chance that by the time the environment has stabilized, stock prices will be higher – possibly significantly higher. We often ask our clients, “Do you think market prices will be higher or lower when you feel comfortable investing again?”

The data below illustrates the unpredictable duration of past corrections. In some ways, the stock market recovery this year also feels premature as the virus persists and layoffs continue. So, to those who wonder if there’s a playbook that works for all corrections, we would say probably not; the irregular durations of prior corrections and the difficulty timing them reflect otherwise.

In the wake of the pandemic, there was a remarkably swift policy response, which served to reduce the magnitude and shorten the duration of the stock market correction. No question, markets have benefited from government stimulus in the form of loans to companies, extra unemployment payments, stimulus checks, and the like. These government transfers helped bridge the economy through the economic shut down much of the country experienced the past several months.

The fiscal actions of Congress and money policy responses by the Federal Reserve and how markets react to these policy responses are also challenging to forecast ahead of time. Financial markets have reacted incredibly favorably to the government-financed response to the economic damage across the globe since March. While we don’t know exactly how the pandemic will progress over the following weeks and months, we believe focusing on a disciplined investment strategy while taking advantage of some of the evolving investible themes is likely to produce a winning result.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

Best Regards,
Edward J. Wilcox, CFA, CFP
Rollins Financial, Inc.

The Economy Continues To Improve, Not Withstanding The Media's Attempt To Talk It Down

The month of July 2020 will clearly be one to look back on in financial history as an important month. After an avalanche of negative publicity regarding the economy and the prospects for the U.S. to pull out of the pandemic, the economy continued to strengthen and the stock market reflected that strength. It has been absolutely amazing that for all of the negative headlines we have read regarding the economy and the spread of the virus, that the stock market has dramatically improved over four straight months. July was an extremely strong month for all financial assets.  

I have a lot I want to discuss in this posting and some of it is quite valuable information. I want to explain why the stock market is not likely to have a major downturn due to negative real rates of return. I also want to rebut the so-called “pundits” that argue that the rise in the stock market is a bias against the working class and mainstream. Obviously, they do not understand, as do I, the Wealth Effect which I will explain later in this posting. 

Partner Eddie Wilcox and his wife, Jennifer, walking the beach

Most of the general public has completely missed the implication of Zero-Sum economics. They just do not understand that if one segment of the economy suffers, by the effect of Zero-Sum, some other segment of the market must be strong. That has proven so clearly true in these very difficult times. The most important real-world example I can give you is from the famous comedian, George Carlin, as he described why this country became so fixated on germs. Even though this famous comical dialogue was recorded 20 years ago, it is so very true in today’s economy. I will give you his thoughts.

Before I launch into those fairly interesting subjects, I need to cover the markets for July which were excellent. The Standard & Poor’s Index of 500 Stocks was up a sterling 5.6%, during the month of July. Year-to-date this index broke into the positive 2.4% and for the one-year then ended in July, it is up 12%. In the first couple trading days of August, this index is now less than 1% below its all-time high level. The NASDAQ Composite continues to be the forerunner in all the indexes, up 6.9% during July and year-to-date is up 20.4%. The one-year return on this index is an almost unbelievable 32.8%. This index has outperformed mainly because it is where so many of the young tech companies reside. If you think this is just a flash in the pan, the ten-year return on this index is an excellent 18.2% annually.  

The Dow Jones Industrial Average was up 2.5% during July but continues to be down 6.1% for the year. The one-year return on these 30 largest stocks is, however, positive at 0.8%. Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.4% for the month of July, up 8% for the year 2020 and for the one-year period up 10.2% for the period ending July 2020. While this was an excellent year so far for the bond index, a couple things are truly interesting. 

Ava and her mask social distancing

Most times the stock market and the bond market move in opposite directions. If stocks are up, bonds are down and if bonds are up, then stocks are down. However, this year those stocks and bonds have rallied significantly so far. That is not normally the case, in that the ten-year annual returns for all the stock market indexes are double digits. The ten-year return on the bond index is a meager 3.8%. I will explain later in this posting why one of the major reasons the stock market continues to go up in an otherwise negative economy has much to do with the real-world effect of negative normalized rates of returns.  

Almost every day I am confronted by an investor asking with great anger and disbelief, “How can we continue to be invested in stocks when the valuation is absolutely crazy at the current time? As of the end of July, the 12-month trailing P/E for the S&P is 26.8 versus 18 at the end of March.” They give me this example with the conviction that this level of P/E earnings is unsustainable and is at a historic height. I am always confused why investors always look at the past and never the future, which is much more important.  

There is absolutely no questions that based on the disappointing earnings for 2020, that stocks are historically high. However, history will always rate 2020 as an outlier. What good information do we have in valuing stocks at a 26 multiple when we know that earnings are depressed - but earnings are likely to improve. It is now the current projection of the S&P, that earnings over the next 12 months should improve by over 48%. If earnings are to improve, as suggested, at 48% should you evaluate the market based on the trailing price earnings or evaluate it on its prospects? Clearly, anyone who has been investing for any period of time knows that whatever has happened in the past is in the rearview mirror, but what we should all be considering is not the past, but the future. Based on future earnings, the market is more closely valued at its March levels than its July levels. Some segments will see greater than 48% – think airlines and hotels. 

The Schultz family at Sea Island

The evidence that the economy is improving is virtually everywhere, but you just have a hard time evaluating it because the media is so negative on the economy. In reading the news over the last couple of weeks I picked out items that were clearly positive for the economy, yet seemed to be ignored by the public. The State of Georgia recently announced that their collections of income tax and sales tax for the month of July was 17% higher than the month of July 2019. Take into perspective that analysis. All of us will acknowledge that in July 2019 the economy was very strong and the population was almost fully employed. However, during the month of July 2020 unemployment was high and the economy sputtering. But the reason should be fairly clear.  

Retail sales have taken a major move up since the lockdown. Part of this, of course, is pent-up demand, but yet retail sales have come back a lot quicker than anyone expected. I will explain this phenomenon later on based on Zero-Sum economics. Also, even though there were huge amounts of the population not working in July, that doesn’t mean that they weren’t being paid. Due to the massive Federal Reserve influx of money, most of these unemployed were making similar amounts of compensation unemployed as they were making employed. People forget that unemployment benefits are taxable and withholding is required. Once again, even though the media would like you to believe the economy is completely in a state of disaster, the facts belie such headlines.  

There seems to be a general lack of knowledge of Zero-Sum Economics. I have clients come in all the time and complain to me that it is impossible for the market to go up because all we have to do is look at the restaurants, airlines, cruise industry and retail to know that the economy is in shambles. Yes, no question, those statements are true, but where did the dollars that would have been spent on those industries actually end up?

Harper Wilcox, age 10, getting some fresh air at the beach

In a Zero-Sum Economy, if money is not spent on one item, but gets spent on another item, then the economy is at zero. If a family does not spend money on going out to restaurants, going on cruises, flying in airplanes or taking vacations, that is clearly a loss to those industries. If, however, that money is spent somewhere else, the economy does not suffer or, just as good, a family saved more. That is exactly what we are seeing today. Do you believe that there are not shortages in certain aspects of the economy? There clearly are, you see them every day, but you just do not realize it.  

Why do you think the grocery stores cannot keep up with toilet paper and paper towels? Those industries are clearly booming as others fail. New car sales have been at historic highs recently. Does that not mean that the manufacturing industry of cars is working overtime to meet the demand? It is my understanding now that golf courses are overwhelmed with people wanting to play and golf equipment and golf clothes reached all-time highs during the month of July. Once again, those dollars are being shifted from one segment of the market to another. One client reported to me that they had ordered a brand-new golf cart for their vacation home but there is such a backlog of orders that delivery has been postponed. Everywhere in the economy you see a negative, you need to look at the other industries in the economy that show strength. While certainly restaurant sales are down, pizza deliveries are skyrocketing. It is everywhere, but due to the negative influence of the media you just cannot see it. What is so clear to me has been largely ignored by the media, is there a reason the media emphasizes the negative and not the positives?  

As mentioned in previous postings, the Federal Reserve and Federal Government have dumped over $3 trillion of money into the economy. If anyone understands the velocity of money, then you understand what $3 trillion dumped into the economy over 90 days does. The acceleration of spending must occur or there would be a huge savings component. In real dollar terms, that means if you received this money you had two options. If you elected to spend it, the velocity of money being at 7, would generate $21 trillion of economic growth. However, in times of great uncertainty with the unknown future of your job and family security, the other possibly was that you just saved the money for a so-called “rainy day”.  

It is now reported that the American economy has over $5 trillion in cash sitting in checking accounts in banks and other places. Given that this savings rate would be deteriorating daily with the level of inflation, it is a pretty good bet that this money will either be spent or invested over the next 12 months. If spent, then the economy will continue to grow and if saved the financial markets will continue to go up.

As stability occurs in the economy, a greater percentage of this money will be spent creating a higher economy. Rather, if invested it will create a higher stock market going forward. One of the reasons that the stock market held up in this recent crazy time is the argument that there is really just nowhere else to put the money. Already the 10-year Treasury Bond is trading at 0.5% and is at a negative real interest rate. If you calculate the cost of inflation, the rate of return on that bond is likely negative at 1% per year. That means that every day that you hold that bond, you lose money after the cost of inflation. It is the same if you hold money with cash. You are losing money every day against inflation.

Lucy Wilcox, age 8, playing in the sand

Cash may give you a warm and cuddly feeling by having it on hand but the fact that every day you hold that cash you are losing the value of purchasing assets since the rate of return is now negative. So, the argument must be that I will hold bonds because I believe they will appreciate it the future because I know that they do not pay any rate of return. Remember that a $100,000 bond generates roughly $500 a year in income and every year that income is less than the cost of inflation.  

But now we have come to the point where bonds have actually run out of basis points to decline. The ten-year treasury is at 0.5%, it does not have much further it could fall. Couple that with the fact that the Federal Reserve is in an all-out war to create inflation. By virtue of the Federal Reserve, flooding the economy with money is a clear reason to try to increase inflation to increase the economy. Nothing could be clearer than recently the price of the U.S. dollar has fallen as the price of gold has gone up. Gold moves inversely to the U.S. dollar since most of the gold is held outside of the United States. But these are clear signs that the Federal Reserve’s effort to increase inflation is working. With a very low return on bonds and a very real possibility of increased inflation, you are locking in real-value losses by holding either cash or bonds. This is one of the reasons why the market continues to be held up, notwithstanding the avalanche of negative publicity.  

Three or four times a day, I am approached by investors saying “What if the Democrats were to win the election in November. Won’t the stock market suffer a major decline?” While certainly no one knows how the election will turn out, you must be prepared on all fronts. If the Democrats do win the election, and certainly if they win the Presidency and both bodies of Congress, I expect the market would decline, but not appreciably. The reason why it will not decline appreciably is for the reasons above - what are your alternatives? You may be in cash temporarily, but you will eventually migrate back to stocks. Will that period be a week, a month? Certainly, no one knows. However, it will not be long-term and certainly the period of time when the correction occurs would certainly not be worth the effort to trade around it.  

I get so very tired of hearing the pundits criticizing the stock market as being only for the wealthy. Their argument is that the average person’s life is not improved by the value of the stock market and, therefore, any attempt to make it go higher is only focused for the rich and not the middle class. Obviously, those people are not very well educated in economics or the wealth effect.  

First off, the general public is very much invested in the stock market. It is believed now that $2 billion per day flows into 401(k), 403(b) and 457 Plans which flow directly into the stock market. Fidelity Investments, the largest holder of 401(k) money, reported that during the March 2020 selloff, the 401(k) investors made little or no changes to their asset mix. This is the way it should be. Long-term investors should never react to short-term market fluctuations. It seems that 401(k) investors are becoming better educated on how to deal with huge market fluctuations that are principally controlled by market manipulators.

However, these pundits do not really understand the wealth effect. The wealth effect happens when the market goes up and money is withdrawn from those profits and spent on other things. Almost every day we have a client withdrawing money from their account to buy or construct something. It may be to buy a new car, it may be to go on vacation, but more times than not it relates to improving their home. 

Reid and Caroline Schultz watching the sunset on the water - ages 4 and 6

When money is withdrawn from the stock market and used to add an addition to your house, suddenly that money employs people. It employs people from the Main Street economy for both the construction workers and the people who build the materials. If a client takes money out of the stock market to buy a car, does that not put money in the pockets of the people who manufactured that car? There are so many examples o

f money coming out of the market to create liquidity to Main Street, for those pundits to argue that it is immoral to advocate stock market performance have, by the definition of the wealth effect, been proven incorrect.  

Every day we see the effect of low interest rates improving the economy. Housing sales are booming, and construction workers are working at maximum levels. As clients take money out of the stock market and benefit from lower interest rates to refinance their mortgage or add additions to their house, they create wealth, as almost assuredly inflation will positively impact the value of their home ownership. Every day we see the wealth effect taking place as the market moves up.  

The exact opposite happens as the market moves down. What you see are people who are invested that are less likely to take profits since the profits are lower and, therefore, there is negative wealth effect. It is not that investors use their excess cash to invest, but it is rather that they do not withdraw from their investments in a period of a down stock market. Over the last four months we have seen extraordinary gains in the stock market, and we are seeing extraordinary withdrawals to buy consumer goods. I do not understand how you could argue that this is anything but good for the economy.  

Since there is virtually nothing to watch on T.V. nowadays except for Major League Baseball, in my case, I often drift into old YouTube comedy routines. During my era, one of the most famous was the comedian George Carlin. I ran across a couple of his concerts over the last few weeks and enjoyed his complete “off the wall” look at his neighbors and the American economy. One that I found terribly interesting was his analysis of the fear of germs. In his way of thinking, this country has become completely neurotic, with the population in the U.S. obsessed with security, safety, crime, drugs, cleanliness, hygiene, and germs. His words, not mine. But clearly, he has a point since we have, in my opinion, so grossly overreacted to this pandemic that it warrants further discussion. My favorite example is how we have become so neurotic with germs that even in prisons they swab the prisoner’s arm with alcohol before giving him a lethal injection! Think about that for just a second. For a person that they are clearly trying to put to death, they are concerned that he might get an infection. Overreaction – no question.  

Each time I read the statistics of the pandemic, I wonder whether it is political in nature. Why are some states more restrictive than others when it comes to allowing the population to go back to work? In New York, as an example, they have still not even reopened their indoor dining rooms, yet they have announced that schools will be open in the fall. So, how does that even break down in economic terms?

The famous comedian George Carlin

If you analyze the various states for joblessness claims and those that are receiving benefits, it should be clear which states are abusing those rights and those that are not. In the most recent employment report dated July 18, 2020, 18.1% of all workers in the state of California are receiving unemployment benefits. In New York, that ratio is 16.3% and in Connecticut it is 15.2%. If, however, you compare it to other states, 3.6% of the workers in Iowa are receiving benefits, 4.5% in Utah, and 4.9% in Alabama. You do not have to be a mathematical wizard to see the contrast between those states that would prefer a change in administration as compared to those states that are likely not to want a change. Political – who knows?

The evidence is everywhere that the economy is improving, notwithstanding the horrific headlines you read daily. It is also fairly clear that earnings next year will rebound to normalized levels and, therefore, the value of the stock market is not overvalued, but is at a reasonable level. I do not expect a major downturn, but if there is, it will quickly recover and your long-term investment goals should be reached. This virus is a terrible plague on the economy, but it is time that all of us recognize what the risks are and move forward. We turned loose the American spirit and put Americans back to work at home, now we need to turn loose the American spirit and have the public eat in restaurants, fly on planes, stay in hotels, and move on with the rest of their lives.

The month of July also brought another recognition for Rollins Financial, Inc. It is a very humbling thought that for three years in a row we have been selected as one of the Top 300 Registered Investment Firms in the United States. That is really hard to contemplate given the scope of that recognition. To put it into perspective, there are probably 300 companies in the Greater Atlanta area alone that classify themselves as Registered Investment Advisors and we were in those that were selected out of all of the firms in the United States. I guess you can always say that it wasn’t an overnight success, since it took us 30 years to get here. When we received the recognition back in 2015 by CNBC TV as being the 20th best Registered Investment Advisors in the United States, we had $272 million under management. Today we manage for clients’ roughly ¾ of a billion in assets. Obviously much of our success is from the willingness of our clients to let us help them in planning for their retirement, but all of us should acknowledge the fact that we continue to grow and get referrals when clients make money. No other attribute is more important in the growth of a firm like ours. If we have not said so recently, we certainly appreciate all our clients that we help to reach their goals. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,

Rollins Financial, Inc.

Unleash The American Spirit. Put Americans Back To Work – The Good And Bad News

I walked down to my mailbox this Sunday morning and things seemed perfectly normal. I could actually write my name on my car due to the heavy pollen. It is a passage of spring in Atlanta to have the yellow pollen all over everything outside. It doesn’t do much for your sinuses, but it does mean that spring is coming.  

As I walk through the yard, I notice that the crabgrass and chickweed are growing fabulously well this spring. I have learned over the years if you cut the grass short enough, it all still looks green. As I walked back from the house with the morning newspaper, I noted that virtually no one was on the streets and the city was calm.

Josh (17) and Ava (2) taking a stroll to the beach

After driving to work, I can see that the world is not normal. Almost no one was moving around and clearly America has changed over the last 30 days. I could never have imagined, nor could anyone have expected, that the extraordinarily robust economy of America at the middle of February would have crashed to a halt by the end of March. The turnaround was exceptional by any definition, wherein the government insisted that private businesses close and suffer the economic consequences. Never in the history of America has this ever occurred. With all the major negative events such as World Wars, 9/11 and the financial meltdown has the government ever gone to private businesses and insisted they forfeit their financial futures?  

I will be the first to admit I know very little about the science of the virus. I cannot give you any recommendations or predictions on the spread of the virus or how to prevent or avoid it. However, I read the numbers every night and actually keep on my desk a scorecard of new cases. What I do know, without any involvement from the medical world, that we must put Americans back to work in order to save our society. Which is more important?

I intend to discuss all of these very interesting items, but I must report on the very negative financial news from the first quarter and the month of March. The Standard & Poor’s Index of 500 Stocks fell 12.4% during the month of March and is down 19.6% for the first quarter of 2020. Even with those dismal numbers, that index is up 10.5% for the 10-year period. The NASDAQ Composite fell 10% for the month of March and is down 14% for the first quarter of 2020. For the 10-year period this averaged 13.7% per year. The Dow Jones Industrial Average fell 13.6% during the month of March and is down 22.7% for the first quarter of 2020 yet remains up 10% a year for the last 10 years. The Barclay’s Aggregate Bond Index fell 0.2% during the month of March and is up 3.7% for the three-month period and for the 10-year period has averaged 3.9%. As you would expect, bonds did better than stocks. 

The first rose of the season at the Rollins’ house

During the quarter it was clear that investors were jumping out of the market and getting whatever cash they could reserve. It was an interesting period of time where virtually everything lost money. Even bonds went down before the magnificent efforts of the Federal Reserve came in to prop up the bond market. While many people characterized this as a bear market because of the standard definition of a 20% reduction, this bear market is unlike any previously. Other bear markets have been created because business was bad for one reason or another. In this particular case, business was not bad, it was great, it only became bad because the government insisted that it be bad. Now we have to evaluate whether and when the economy will once again start up for real.

I have to admit that the actions of the Federal Reserve have been remarkable and thank goodness we have a chairman of the Federal Reserve that saw the need and met the need by an overwhelming response to Americans as a whole. Fortunately, we do not have a Federal Reserve that sits back on its hands, as we did in 2008 and waited for the crisis to get here before acting. This time the Federal Reserve brought out the so-called “Bazooka” of help for Americans. While the skeptics are everywhere and the dire news floods the media, they just really do not understand the economic power that the Federal Reserve has unleashed. As I opened, I mentioned that I do not know much about medicine or the spread of this virus. However, I am pretty good with numbers. As of this morning, the weather channel reports that less than a thousand people in Fulton County have contracted the virus. The population of Fulton County, Georgia is roughly 1.1 million and that means that less than 1/10th of 1% of the County population has contracted the infection. There is no way of knowing exactly how many have recovered, but let’s assume that reported number is correct. If that is in fact correct, then over 99% of the population has not contracted the virus and deserves a right to earn a living in this weird economy. I am not suggesting that Americans be allowed to go back to work immediately, but I am suggesting that come May 1st, businesses and businesspeople be allowed to resume their economic life.  

I have never seen a situation where we keep a daily tally of sick people. If you look at the most recognized chart on the subject, as I write this posting, there is roughly 1 million net cases in the entire world. If that is the case that means that there are seven billion people that do not have the virus. My point is you cannot deprive seven billion people from making a living by governmental intervention. Free society will only survive if businesses are allowed to fend for themselves. We will never be able to solve the unemployment issue in America until these companies are allowed to work. This is a case of clearly some have never stopped working and yet specific industries are all but shut down by governmental intervention.

A funny, and too true, quote

There are enormous economic benefits that are occurring right now to help the economy. I read all of the financial press comparing the current situation to the recession in the 1930’s or the recession that followed the 2008 financial crisis. I read about the depressed world after 9/11 and after the dot-com explosion around the turn of the century. While each of those financial realities were severe, not a single one of them had the calvary coming to rescue the economy as we have today. How will all of this work in the future? No one knows. However, I have studied the economics and cannot be as negative as the financial press seems to be. 

Ava working hard on her homework

Already the Federal Reserve has come in to create liquidity in the bond market and the municipal bond marketplace. In addition, they have guaranteed the money market accounts and have moved liquidity throughout the economy. In 2008 if they had moved so quickly, a large portion of the financial decline would have been avoided. The true winner, and the move that might save millions of American jobs, has been the Treasury and the Federal Reserve working to create liquidity. The announcement of the $2.2 trillion in financial stimulus that the government is in the process of handing out, is beyond amazing. First you must understand that virtually all of this money is basically a gift. The $350 billion gifted to small businesses is an outright gift. It is not a loan; it can be forgiven if businesses continue to pay their employees. The stimulus checks that will go out in late April or early May are an outright gift. They do not reduce your taxes and it is money that you will not have to repay. Americans, being Americans, most likely will spend this money immediately, creating commerce. None of this has ever happened before.

I understand the economic effects of a $2.2 trillion stimulus package. When I was studying economics in college, we learned that the velocity of money has a seven multiple. What that means is that you spend a dollar at the grocery store and that dollar is used to pay an employee and that employee uses that money to buy food and the restaurant pays their employees, etc. Basically, the same dollar is spent seven times in an economy before it is completely extinguished. Under that assumption, you also assume that at some point a portion of that $1 is saved. I doubt very seriously that in the economic upheaval that very many will be saved, but I understand the effect of this $2.2 trillion. If you assume that the multiple is seven times, you are talking about an economic stimulus to the country of $15.4 trillion over the next several months. When we talk about trillions of dollars, most people have no concept of exactly how much money that is. Maybe I can give you an illustration to better understand.  Remember months not years!

With a GDP potential of $15.4 trillion, we are talking about pumping into the economy a potential GDP that is greater than the entire GDP of the country of China in one year. Let me emphasize again, we are talking about creating, in this country, a potential GDP greater than the entire economy of China over a one-year period and we are talking about creating it in 90 days. A further illustration would be that this amount of money is over 3.5 times the entire GDP of the country of Russia for an entire year. Never ever in any economy anywhere in the world has there been such an enormous amount of money injected into the economy over such a short period of time. If anyone out there tells you that they understand what the economic effect of this will be, they are clearly delusional since it has never happened before.  

Whether or not this will work, of course, is the major question. However, there are a few examples of a smaller situations occurring. During the 1930’s, Franklin Delano Roosevelt created the WPA (Works Progress Administration). F.D.R. was a big believer in putting people back to work, but not outright gifts. They created jobs for people to help them out of The Depression and paid for it with the government’s money. At that time, it was believed that there were 10 million jobless men in the United States. The WPA effectively put three million of those back to work creating national parks such as Yellowstone and huge infrastructural jobs such as building highways, schools, hospitals, airports and playgrounds. Of course, one of the most notable achievements of WPA was the building of Hoover Dam, which controlled the water through the Colorado River through Nevada and opened up an entire state with water that can be used to grow food, etc. Much positive work was done from the WPA, and by 1940, the country moved into a much stronger financial economy which accelerated during the years to build up for the war effort beginning in 1942. I understand that the Public Works Program took years to implement and put the money in the public. What we are talking about in this case is not years, but months, and there is no time for government planning. These amounts are going to small businesses which are outright gifts to the economy.

As this money starts to flow from the government out into the public, you are going to start to see businesses start back up. There is no question that many businesses will never reopen, but the vast majority will give it a try. This money will allow them to pay their employees, rent, and operating costs. The question will be whether the public will use their businesses as they have in the past. I am betting for the American spirit that the public will once again support private business and shop at malls, go to restaurants and buy things online, as they always have. I understand it will be a slow process for people to develop confidence, but too many people seem to miss the point that a great many Americans have been paid during this shutdown. Most employees have not lost their jobs and they have been hunkered down through April 30, for at least six weeks. There is a huge build up of demand since they have not spent their money on restaurants, travel or their normal pleasures.  I am betting on what I believe to be a fact, that once Americans are free to spend money again that they will accommodate the economy by participating.

Ava and Dakota enjoying the beach

Yes, I can tell you a lot of negatives regarding this program. Just so that there are no misplaced illusions of how this is happening, this is a situation of the government printing presses working overtime. We are lucky that we have a country where all we have to do is throw a switch and print more money. Yes, I understand this is never a good thing, but in this particular case, it is required. The government does not have the time to issue bonds to pay for this huge amount of money. It must finance it internally, and that means getting the printing presses to work. Yes, eventually they will have to issue bonds to support it and that is a long-term negative when it comes to the national debt. Yes, we all worry about what will happen in the future for our children and grandchildren with the national debt, but as the Secretary of the Treasury said recently, “Now is not the time to worry about debt!”

Almost assuredly what will be created with this huge flood of money into the economy over the short term is inflation. Inflation is not always bad (in moderation). Inflation makes companies’ inventory more valuable and real estate values will go up. I am betting that as we get back to normal, residential real estate will increase in value due to the low interest rates and the potential inflation effect of house prices. If that is the case, that will be a welcome economic event. We can live with inflation.  

I could point out many of the negatives of printing money. During World War II, the world was fascinated by the economics of Germany where essentially a relatively small country took on the rest of the world in war. How could such a small country afford armies large enough to basically conquer the world? It was pretty simple. They just printed more Deutsche Marks to pay for everything. As the war progressed, the Deutsche Marks continued to lose value and inflation was running at a 1,000% or higher per year. It got to the point where inflation was so bad that the German government was required to pay the soldiers on a daily basis since money would be worth much less the following day. Much of the same has happened in Argentina and Venezuela today where inflation runs at a 1,000% annualized rate due to the printing presses working overtime.  

While that certainly is a potential negative, the ability that the United States government has to finance debt is extraordinary. The U.S. dollar is still the safe haven of the world and no country has the ability to print money and absorb it into the economy as the U.S. government has. I think there is no question that this entire flood of money will create inflation over the coming year, but I also know that the upcoming inflation will be welcome. If you are talking about investing in bonds that pay nominal interest rates, inflation will almost assuredly impact these bonds negatively. The 10-year Treasury bonds earn less than inflation.  

So, what is the timetable to get back to normalcy? We now know that the country is in essential lockdown through April 30th. April will be a most difficult month as the number of cases go up and the deaths occur. But look at China’s example and you will get some clarity. China first recognized the virus outbreak at the beginning of 2020. Three months later the country is back almost operationally at 100%. McDonalds and Starbucks report that all of their retail stores are open in China and manufacturing has recovered over 80% of its prior production. People are back at work earning salaries and the economy is going to pick up. So, if that three-month recovery period in China is the same as we will witness in the United States, then recovery should be realized by May 15th. Not full 100% capacity, but certainly a good start.  

The first real recognition of the virus in the United States was around February 15th and three months would get us back to May 15th. If we get back to work around the first of May, I see realistically May 15th as potentially being a recovery time period. While we all feel sympathy for the people that have died, there does not seem to be any perspective of the numbers in the media. As an example, in China less than 5,000 died by virtue of the virus. Now, you can question the numbers all you want since no one will ever know the exact number of deaths. But if you put into perspective in a normal year in the country of China, ten million people die per year. Ten million people die without the virus and 5,000 deaths due to the virus is hardly a rounding error.

We have to unleash American spirit to get going. We need baseball and basketball to begin again on May 1st. We can play without fans, but we need to get playing. Both of these leagues have enormous financial capabilities and they can test every single player and person in that stadium daily to see if they are well. To operate a baseball game without any fans, you are talking about less than 200 people to make it happen. You could easily test those people every single game to avoid any sick people. A professional basketball game would take even less people to operate. To assume we cannot function in empty stadiums borders on ridiculous. We can turn them loose so the American spirit can once again increase out of this incredible discomfort.  

I have no idea what or why the media is fixed on this subject. My reading of the media at the current time would be that no American will actually ever go back to work. I really cannot get my hands around whether this incredible flood of negative information is designed to further hurt the economy or if it is to be a public service. Might their negative publicity be to hurt the economy, by hurting the economy it becomes a political realization. I would hope that were not the case, but given the exaggeration and almost hyperventilated reporting, you would have to believe it was. 

Joe, Ava and CiCi in matching shirts

So, the question that everyone wants to know is when the stock market will recover. I guess I will have to quote my favorite quote-master Yogi Berra. “It’s tough to make predictions, especially about the future.” Yes, Yogi was very good in explaining things in his own sort of way. I have to admit, I do not know when the stock market will recover, however I know that it will. It will move to new highs.  

There needs to be a better understanding that many businesses have operated through this down-cycle and have prospered. Obviously, the grocery stores, online sellers and computer companies have continued to operate and prosper. There will be winners and losers at the end of the day. However, I am convinced that once this $2.2 trillion starts running through the economy, there will be a quick return to normalcy. Admittedly, we will never be what we were. Social distancing will continue for years until a proper vaccine is prepared, but much work has been done already and antibodies have been created that will help people get well. The American ingenuity regarding healthcare and cures will be funded by governmental money at unprecedented levels. I have high confidence that by late summer, we will see significant progress.  

So, it appears that the first quarter will be a slightly negative GDP and the second quarter will probably be negative by at least 10%. But it looks like to me that by the third quarter, the GDP will basically break even and by fourth quarter, marginally positive. If those predictions are somewhat accurate, by the end of the year stocks will have gained back much of the losses that we have incurred. To not be invested now is a mistake.

Actual tickets to the Beatles concert in Atlanta.

August 18th, 1965; $5.50 each ticket

I get a lot of clients and I hear a lot of commentators complain about the swift losses that we have incurred, which is unprecedented. Yes, the speed in which it occurred is unprecedented, but the losses are not. For the first three months of the year, the S&P 500 Index was down 19.6%. It has been an extraordinarily painful downfall, but certainly not unprecedented. As early as the fourth quarter 2018, the S&P was down more, percentage-wise, in that quarter. And what happened after that date?  In 2019, the S&P Index recovered a sterling 31.9%. 

So you ask, as you should, when will the market recover? None of us actually know, we just know that it will. It always has. Unlike 2008 when the market went into Bear Market conditions, it was for a very good reason. A large and important section of our economy was broken. The banks were essentially broke and they are the cornerstone to American finance. In 2020, the banks are stronger than ever and will benefit from the stimulus.  

In 2008 we did not have the intervention of the government to basically give away free money to create commerce. No one knows what the effect of this will be, but as pointed out above, it is likely to be extraordinary. So, while I think the market is going to continue to be volatile, the trend will eventually be up. It makes me sick to watch the machines operate on Wall Street every day going up or down 500 or 1,000 points on a regular basis. These machines are not investors, they are spectators.  

I wish I could explain to investors that these moves are not investing. They are outright speculation and mean nothing long-term. Yes, your portfolio is down, but America is not down for the count. If you believe, like I do, that recovery is four or five months away, giving up on America is always a bad choice.  

On that note, stay healthy and come visit with us soon and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. We welcome you.  

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Why We Are Not Panicking

Stock market declines and corrections, like the one we are enduring now, are always frightening for investors. Yesterday, markets logged steep losses, even triggering a pause in market trading as indexes surpassed the 7% threshold. This followed a string of volatility which has seen the S&P 500 drop roughly 20% since the market closed at an all-time high on February 19. While the Coronavirus had been the recent culprit for stock market weakness, the market action yesterday was exacerbated by the price war on oil between Saudi Arabia and Russia. Crude oil dropped almost 25%, while many energy stocks were down 20% or more in one trading session.

This particular event may be resonating with us a bit more than the typical stock market correction because the Coronavirus outbreak is affecting more than our financial assets and investments. We have spoken with lots of individuals whose personal lives and business dealings have been affected in some way by travel restrictions or the threat of the virus.  

We believe the recent Coronavirus outbreak is likely to be a short-term disruption to the economic prosperity we have experienced since the aftermath of the financial crisis in 2008. Incidentally, the market bottomed on March 9, 2009, and was 40% higher within a few months. We have no way of knowing yet whether March 9, 2020, will mark the bottom for this particular correction. Still, there is precedent for the market being significantly higher following a sharp correct just months later.  

Through February, the economy has been doing quite well as the jobs market remained quite strong. But, then the Coronavirus interfered with many supply chains and customers in China. It has turned into an event that potentially will have a negative economic impact for at least several months.  

However, our base case is that these economic disruptions will probably be temporary in nature. Markets will likely recover in the months ahead as societies all over the world work through this new threat and how to properly contain the spread and develop treatments.  

We do not yet know for certain how this outbreak will play out, either in human or economic terms. But in the aftermath of previous epidemics like Ebola and SARS, the markets have been higher 6 and 12 months after the outbreak started without exception.

In addition, the Fed has already reduced interest rates, with more reductions likely to come. Mortgage rates have dropped significantly, encouraging borrowing and refinancing that is likely to save consumers thousands of dollars in annual interest costs for the duration of these mortgages. Fiscal stimulus in the form of tax cuts and other support are also being considered. 

While we acknowledge some uncertainty with this situation, what we do know is that staying invested for the long haul has been wildly successful. Unfortunately, we are required to endure volatility to enjoy the fruits of staying invested. In fact, cashing out of investments and missing impactful rebounds can cost your portfolios severely.  

We would recommend doing the following:

• Stay disciplined and remain invested. Often the best stock market days occur during heightened volatility. Missing the best days can significantly reduce your long-term returns. Going back to 1930, if you missed the best ten days in each decade, your performance would have been reduced to 91% instead of nearly 15,000% return.

• Consider making contributions now. Consider front-loading your annual 401k contributions with stocks selling at a 20% discount compared to a few weeks ago. This suggestion also applies to those yet-to-be-made IRA and Roth contributions. Be mindful of how this might affect your matching contributions. Or possibly keep this in mind should prices fall a bit further.

• Review your financial plan. We prepare and update plans for our clients daily. As mentioned, we think investments are likely to rebound in the months ahead. Updating your plans and reviewing your overall financial objectives are often a great way to evaluate your sustainable patch, despite the recent stock market correction.

• Rebalance your investments. We view the current situation as a potential opportunity to add to your equity positions. At Rollins Financial, we review your investments regularly and often rebalance each quarter, but sometimes, we do assess all situations more often than quarterly.

We invite you to discuss your portfolio, your financial plan, or thoughts specific to your situation with us. We continue to monitor all of the client investment accounts and the forward-looking investment strategies we are recommending.

My Long History with the Atlanta Braves

There is not a great deal of new information to report for the month of September 2019. Although the markets were extremely volatile during the month of September, the upward trend remains intact. It seems like every headline was filled with someone or another forecasting a recession just around the corner. Also, the headlines were full of political news due to the upcoming 2020 Presidential election. While presidential elections should, in my opinion, have absolutely no impact on financial markets, they almost always do. 

Since there was not a whole lot going on financially, I would like to relay my history with the Atlanta Braves. The Atlanta Braves are currently in the playoffs and at this writing no one knows what the outcome will be. However, I became a season ticket holder in 1989, so this marks the 30th year of my participation. Over that time, as you will read later on, there have been many ups and downs throughout my attendance. 

Ava's first baseball game

Before I get to the more interesting part of this posting, I must report the financial results for the month of September. For the month of September, the Standard & Poor’s Index of 500 stocks was up 1.9% for the month. For the year 2018 through September, that index is up 20.6% and the three-year performance is 13.4% and the ten-year performance is 13.2% annually. The NASDAQ Composite was barely positive, up 0.5% for the month, up 21.5% for the year 2019 and up 15.9% three-year period then ended at a 15.5% for the 10 year annual returns. The Dow Jones Industrial Average was the winner for the month at 2.1% and that index is up 17.5% for the year, 16.4% for the three-year period and 13.6% for the 10 year period. Just to form a comparison, the Barclay’s Aggregate Bond Index was down 0.6% for the month, but is up nicely for the year 2019 at 8.4%. For the three-year average it is up 2.9% and for the 10 year average it is up 3.7%. Even though bonds are having a very respectable 2019, the ten-year returns are roughly one-third of what any of the major market indexes reflect.

One of the most important components of understanding gross national product (GNP) in the United States is to realize how it is calculated. Over the last three decades the U.S. economy has shifted from a factory environment to more service-oriented. As a matter of fact, the service index greatly outweighs the manufacturing index, and more importantly, consumption or consumers themselves represent roughly two thirds of the calculation of the GDP. It seems that the U.S. was perfectly willing in the 70’s and 80’s to allow manufacturing to lead the United States overseas. China was the major benefactor of that transfer of manufacturing and since they had more favorable labor rates than the U.S., the U.S. government was perfectly willing to take that over. Now we want it back!

There is no question that the U.S. is dominant when it comes to services, and certainly dominant when it comes to technology formation, but the real challenge is trying to determine without manufacturing exactly which way the economy is going. The last several months we have seen major swings in the equity markets based on assumptions from others that the economy is either moving ahead or moving down. As I have pointed out in these writings before, the most important component by far in calculating the trend of the market is the number of actual people working. If you have a job and you support your family, you will consume. You will pay for food, transportation, and even some entertainment. The more people working the more people will add to the economy. The most important function that any government can do is to keep American workers at their jobs. It seems 2019 will be a record in every regard when it comes to employment.

Josh and Carter Roberts are engaged! Wedding plans are underway for next summer!

On Friday, the government announced that the jobless rate in the United States had reached 3.5%, which is the lowest unemployment rate in this country in 50 years. Just let that information sink in for a second. There are more people working in the United States now than ever in its history. Yes, the unemployment rate was lower previously, but the number of Americans has increased dramatically over the last 50 years and now more people are working than have ever worked in this country before. Given the outrageous political exclamations that you see on the news every day, do you not find it comforting that so many people now have jobs and employers are actually seeking more employees than are available? 

You really have to read a report on the unemployment rate to understand how wonderful the news was. In this report for September, the unemployment for workers with less than high school diplomas dropped to 4.8%. Think about that just for a second; workers below college level now reach a rate of 4.8%, which by definition is below the perceived full-employment rate of 5%. Even more good news was that joblessness among Hispanic men declined to 3%. This level of unemployment by Hispanic men was the best on record tracing back to 2003. Therefore, the number of employed with less than a high school diploma is the best that has ever occurred since 1992, when the labor department first began reporting this index. The Hispanic rate is the best since 2003. 

One of the true indicators of a good economy is how broad the employment was. So many politicians argue that the workforce is tilted toward the rich and not the everyday workers. As you can see from this employment report, employment is strong throughout the workforce, including Hispanic workers and the less educated. 

I guess I get somewhat weary about discussing the economy when you see such tremendous coverage given to unimportant economic facts. Just last month we were awakened to the realization that Iran had used drones to bomb the refining manufacturing plant in Saudi Arabia. Suddenly, the price of oil jumped up 10% despite the U.S. buying virtually no oil from Saudi Arabia. As the price of oil went higher, the equity markets went lower under the fear that the U.S. would initiate war with Iran. Many of the forecasters on television espoused the military prowess of Iran without bothering to check the facts. Surely, if the United States would enter into a prolonged war with Iran the price of oil would double, and the economic effects would be crippling.

First off, we do not buy oil from Iran, nor have we for decades. Secondly, our consumption of oil from Saudi Arabia is very low. But most importantly, the Iranian army is not much of a threat. They barely have an Air Force that flies and few Navy armaments. Do you realize that the economy of Iran is not even as big as the GDP of the state of Georgia? During this month, I heard a military assessment of the Iranian military indicating that it would take maybe one full week to take out all of their military installations. But none of us want war with anybody, including Iran. Their economy is in complete disarray, they are controlled by a dictator and their own people hate their government. Isn’t it interesting that everyone wants to come to the United States, but hate us so much? 

Partner Danielle Van Lear with Josef Martinez of Atlanta United

I read an article this month about the nuclear financial bomb that the Chinese could deploy against the United States. Not a nuclear bomb in the form of nuclear energy, but a nuclear bomb in the form of debts. Several prognosticators say that if China really wanted to hurt the United States that they could just drop all of their U.S. Treasury holdings in one fell swoop, destroying the U.S. economy in the process. Once again, do these people even do any research?

Yes, it is true that the Chinese hold roughly $1 trillion in U.S. Treasury Bonds, but do not forget that there is currently $22 trillion in U.S. government debt outstanding and, actually Japan holds more than China at a little over $1 trillion. However, 70% of the U.S. Treasury debt outstanding is actually held by the U.S. government itself. For many years the Social Security system has bought treasury bonds with its excess Social Security payments that it receives through tax withholdings. So, even if China were to sell all of their bonds in one sitting, it would hardly affect the price of U.S. Treasuries given that it represents only 4% of total outstanding bonds. Further, the Chinese realize that selling these treasury bonds would create a huge swing in their currency by strengthening it by virtue of selling U.S. dollars and buying local currency. The last thing the Chinese want to do is strengthen their currencies, making their export prices expensive and, therefore, their manufacturing less competitive in the world markets. You can forget about that fear.

Once again, the issue with Russia this month came up and what effect Russia would have if they tried to pursue further aggression in Eastern Europe. I almost laugh when people on television use this as a reason for the markets going down. I only need to remind you that Russia has GDP that is actually less than the country of Italy. I don’t think anyone is afraid of Italy and certainly no one accuses them of working too hard.

So we morph into the political arena of the potential impeachment of the President of the United States. Once again, a headline that means absolutely nothing in the whole scheme of things. While it is possible that the House of Representatives could impeach the President of the United States since the Democrats have majority, an indictment in the Senate would require a vote of two-thirds of the members and, since the majority of the Senate is held by Republicans, that is not a reality. So why are we spending all of these hours of talk and discussion over something that clearly could not possibly take place? In my mind, it has more to do with the fact that Congress is frozen with inactivity. They cannot pass even the most simplest of bills since they spend all of their time on conspiracy theories. When will Congress actually do what they were elected to do so we can move on with the country’s business rather than this silliness? Isn’t there an election next year?

There is no question that the President is a lightning rod for virtually all Americans. However, it must be said that he has accomplished many of the goals that he laid out in the campaign by reducing unemployment, being tough on immigration, and holding other countries accountable for their excess of unfair trade with the United States. In doing so, he has offended virtually everyone; which is okay with me. I think comedian Dennis Miller may have put it better than anyone else when explaining about current President Trump. As Dennis Miller said, “The simple fact is that if Trump was vaguely presidential, he wouldn’t be President”. I think that pretty much explains the situation. With the fabulous economy we enjoy today, the Democrats fully realize that they are not likely to beat this President at the polls so they must distract the attention of the public away from the economy. 

So, my new worry is if Senator Elizabeth Warren were to win the democratic nomination and the Presidency, what effect would it have on the markets? Remember, she has openly wanted higher marginal tax rates, hikes in capital gains rates, and a higher tax on dividends. In addition to all of that, she wants a wealth tax on the richest people with a net worth more than $50 million. The net effect of higher taxes is to take money out of the pockets of consumers and turn it over to the government to allocate. Maybe that would be better, but not according to the economics books I read. 

Medicare for all sounds attractive on paper, but consider how it would be run. The government does virtually nothing better than the private sector except defense. If you want your health program run by your local DMV, that’s where it ends up. I cannot even fathom that being a logical solution for most voters.

Regardless of what you hear in the financial news, the economy is still doing well. Surely there have been pockets of weakness but with the Federal Reserve now cutting interest rates and with the lower tax rates that are currently enforced, it would certainly not surprise me to see earnings actually up in the fourth quarter on a year-by-year basis. In summary the three components of higher stock prices are firmly in place. Interest rates are low and getting lower, earnings are high and stable, and the economy is strong and resilient and is likely to remain so for two years to come. Based on that trifecta of positive economic news, we expect equity prices over the next year to be higher than they are today. 

I had to force you to read all of the updated financial information to get to the entertaining part of this posting. My history with the Atlanta Braves goes back, in many cases, before many of you were even born. I never started out to be a huge baseball fan; it just seemed to fall into my lap and has become an integral part of my past and hopefully future.

When I was attending Georgia State University to get one of my three graduate degrees, I did so at night after work. At that time, I was single and really had nothing else to do, so after school I would drive over to the old Atlanta Fulton County Stadium and park right outside the main entrance. In those days it was not uncommon that they would only have 3,000-4,000 people at a game. I would buy a General Admission ticket for $2, or oftentimes it would be so late when I arrived that they would not be collecting admission. You could go in the general admission part of the stadium, walk around and sit directly behind home plate since those seats were rarely used. I watched many games during the 1972-1976 Hank Aaron era. I would conservatively say I probably saw Hank Aaron hit 100 of his 755 homeruns during that time. The Braves rarely won, but I admired the ability of certain members on that team.

Josh, age 2, enjoying the Braves (1997)

Josh, age 3, at a Braves game (1998)

My real participation started in 1989. As many of you know, I had a long history with the former WTBS announcer Craig Sager. Not only did Craig and I have the majority ownership in the sports bar Jocks & Jills, we also had a long personal relationship before he died a few years ago. Craig had a difficult personality in a lot of respects. He was sure he knew everybody, and he could open doors no one else could open. In 1989 Craig agreed to buy four season tickets on the second row behind the dugout at Atlanta-Fulton County Stadium. The interesting part of that story is that while he agreed to buy them, he never had any intention of paying for them. When the invoice came due, he forwarded it to me since he thought maybe I would enjoy having them. At that time, four season tickets to the Atlanta Braves was outrageously expensive and clearly, I did not feel like I could afford them. However, since they were good seats and since Craig Sager had arranged them, I went on and purchased them. During those days the Braves were not very good, and I could hardly give the seats away. Who would have ever thought that in 1991 the Braves would go from last to first place and go to their first World Series game? 

Due to these season tickets, I was honored to go to the World Series in 1991, 1992, 1995, 1996 and 1999. How many people can boast that they have actually attended World Series games in five years during the 1990’s decade? I was even there the night that Atlanta won the World Series in 1995. Tommy Glavine pitched a shutout and David Justice hit a homerun that won the series against the Cleveland Indians. I was there when they won 17 straight division championships; it has been a good run.  

I have seen many interesting things and being with the Atlanta Braves has played a major part in the upbringing of my children. The first time I can recall taking Josh to a game was the September 30th, 1997 playoff game with the Houston Astros. At that time Josh was only 2 years old and as you can see from the picture, he fell asleep shortly before the first pitch. Later, when he regained some knowledge of what was going on, I thought it might be interesting if I got him a baseball from the field. I had come to know Braves shortstop Jeff Blauser quite well, so as they were coming off the field, I motioned to Jeff to throw me a ball so I could give it to Josh. When he did, I handed it to Josh to which he immediately threw it back at an unsuspecting Jeff – luckily he dodged it in time. I still have that very baseball in my office. 

I was also there in July of 1993 when the press box caught on fire. As you can see from the picture I took that night, it was quite an event and the game was delayed for a couple hours before finally putting out the fire. 

Press box on fire 1993; David Justice and Deion Sanders

I was also there during the World Series in 1992 when Deion Sanders played for both the Atlanta Falcons and Atlanta Braves during the same season. Quite a media storm occurred when Deion would leave the Atlanta Falcons practice field and fly by helicopter to Atlanta Fulton County Stadium so he could play in the World Series. I was also there when they traded Deion Sanders to the Cincinnati Reds and completely destroyed the morale of the team that year. Deion was a huge fan-favorite, but not until later did we find out that behind the scenes he was very disruptive to the team and not the type of player Bobby Cox was used to coaching. 

I was also there for the very last game in Atlanta-Fulton County Stadium, which was an eerie experience. Even though that stadium was clearly a dump by any standard, it was all I really knew when it came to professional baseball. It was pretty crazy to see the players come on the field at the end of that game, with David Justice walking around the stadium with his handheld camcorder to memorize the event for himself. As you know, in 1996 the stadium was imploded to make room for the new Turner Field which would be used in the 1996 Olympics.

Moving over to Turner Field, we had exactly the same seats and went through many memorable events there as well. I was there in 2000 when Sammy Sosa bounced homeruns off the 755 Club as he won the Home Run Derby. Looking back on the event, it should have been self-evident to everyone that steroids played a large part in his success given that those shots were well over 500 feet. The 2000s were not as successful for the Braves, but many of my clients were able to use those tickets since we have sold them to them for half-price for 30 straight years. Many interesting things happened during the 2000’s, but we never reached the success that we had in the 1990s. I even got to throw out the first pitch at Turner’s Field in 2005.

One memorable event that did happen at Turner Field was that of an unfortunate foul ball. Despite having tickets for 30 years now, I have never once actually caught a foul ball. It really could be said that I have never even been around a foul ball. They have been hit in my area, but I never really had a shot at catching one. I have been given over 100 balls by players coming off the field, but a foul ball, I have never caught. 

In 2016, Dakota, Josh, and I took Ava to a Braves game. At that time Ava was about five years old. At some point during the game, a ball ricocheted off the dugout and actually hit Ava in the arm. Josh and I are both large people, above 6’4 in height, so the fact that a foul ball could find her between the two of us was quite remarkable. She was not badly hurt but, as you would expect, the medics quickly rushed to her to make sure no damage was done. It definitely made a lasting impression; her explanation when asked to go to any games after that was “Daddy, football hurts”. That led us to change seats at the new SunTrust Park. Now we have seats adjacent to the home plate on the eighth row; close enough to see the action, but behind a protective screen. Yes, we were there when Ronald Acuna, Jr. had a Grand Slam against the Dodgers in the 2018 playoffs. This team is exciting, but I guess it really makes no difference. I intend to be a season ticket holder for the next 30 years and whichever team they field, I will be there. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Don't Let the Machines Lie to You - Trust the Fundamentals, Not the Hype!

Back when I wrote the blog on November 6, 2018, Everyone loves a great conspiracy theory, I have one…, I really did not have an answer to the market’s volatility. I suspected (and expressed so in the blog) that there were forces creating the volatility that made no sense and certainly did not represent the fundamentals of the U.S. economy. I was not given the answer until December 26, 2018, the day after Christmas, when the Wall Street Journal published information that supported the theory that I had previously proposed.

Yes, it was a very disappointing year from virtually all financial aspects. Even though the U.S. economy was strong and continues to express strength going forward, the major market indexes finished negative for the year. And yes, I recognize that this negative performance was well below my forecasted gains for 2018. I believed then, and I believe now, that the fundamentals were very strong and will continue to be strong into 2019. What I did not adequately forecast, nor had any reason to believe, is that the machines would spoil our Christmas season by creating losses that were unwarranted by the fundamentals. Hopefully, I can explain all of this to you in this blog, not in the spirit of sour grapes, but rather as an educational process to learn more about how the markets react to given conditions rather than react to basic fundamentals.

Lucy & Harper Wilcox with Santa

Robby, Danielle, Caroline & Reid Schultz

On a seasonal basis, the period of time from November through May of any given year is historically supposed to be the best time of the year to invest. That is particularly true for December, mainly due to pension funds reallocating their assets and putting money into plans to meet their year-end funding requirements. For that reason, it is particularly unusual to see such a huge draw down in the markets for the month of December.  

In fact, it is now said that December 2018 was the worst December in the equity markets since 1931. To really understand how absurd that comment is, you would have to compare the economics from today with those from 1931. This year, we are enjoying 3.7% unemployment, while in 1931 and 1932 the unemployment was 15.82% and 23.53%, respectively. GDP in 2018, the difference in those numbers is not even close. It is anticipated for the entire year of 2018 that the GDP will grow roughly 3%. In 1931 and 1932, the GDP was -6.5% and -13.1%, respectively.  

So, in 2018, we had truly extraordinarily high growth numbers and low unemployment, while in 1931 and 1932 we had huge unemployment numbers and negative growth. To assume they are even comparable certainly creates a conundrum in my mind.

As I scan through the financial advertising that you see on the internet, I am always baffled by the headlines that attempt to scare investors into investing in safe products by stating that stocks could go down 75% next year. As I read those advertisements, I reflect on the fact that over the last 16 years the market has only been negative two times. If you do the math, that is a win rate of close to 88%. Given the chart, where the compounded annual rate of return over the last 16 years has been 8.96% and the average at 10.33%, I always wonder why clients have such fear of the equity markets. Clearly, over this timespan, no asset class has even come close to performing as well as equities.

After an outstanding year in 2017 with the S&P 500 up 21.8%, I guess you could expect a pullback in the performance. This really happened with vengeance in the fourth quarter of 2018. There is nothing good to say about this performance since several of the indexes fell into bear market territory and a selloff occurred in all asset classes. The Standard and Poor’s Index of 500 stocks ended the year down at 4.4% for 2018. The NASDAQ Composite ended the year down 2.9%. The Dow Jones Industrial Average was down 3.5% for 2018. Since the 2018 numbers and the one-year period are identical, you end up with exactly the same numbers for the one-year period then ended. If, however, you stretch out to the three-year period, the S&P ends up with an annual return of 9.3%, the NASDAQ Composite up 11.1% annualized and the Dow Jones Industrial Average up 12.9%. Just for the purpose of comparison, the Barclay’s Aggregate Bond Index was exactly even for 2018 and has only realized a 1.9% annualized gain over the preceding three years.

As pointed out previously, the markets have only been down twice over the last 16 years. However, the fear expressed in the financial publications would lead you to believe a much higher percentage of losses. As indicated in the chart above, do not be misled by the hype, but rather evaluate the actual numbers and see that over the last 16 years you had an 88% chance for profits.

Needless to say, I was really disappointed to see the markets sell off during the final quarter of 2018. At the end of the third quarter, the market was up a sterling 10.6% and it looked like we were on track to have another great investment year. However, in the first of October, the Federal Reserve Chairman gave a speech that rattled the markets. In his speech, he indicated that he would like to bring interest rates up to a neutral level. And what really rattled the markets was when he said, “We’re a long way from neutral...” At that point, despite the very positive fundamental aspects of the U.S. economy, the markets sold off indiscriminately. As I then pointed out, I was not exactly sure why the market was going through such huge swings, but now we have an answer.

In an article published on December 26, 2018, the Wall Street Journal quoted the following: “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot – controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.” So, as my post on November 6th was speculating, there was in fact a true conspiracy theory that was affecting the markets. I highly recommend that you read this article and others on the subject. It is very important to understand that this type of trading has nothing whatsoever to do with fundamentals, but rather momentum. So, when we had the original sell-off at the beginning of October 2018 with a sharp move down due to the Chairman of the Federal Reserve’s comments, the program machines kicked into action trading on the momentum. As the Wall Street Journal quoted, “When markets turn south, they’re programmed to sell. And if prices drop, many are programmed to sell even more.” 

So, as I suspected during this time of high volatility, we were seeing massive program trading affecting the market rather than there being some actual fear of recession or any other type of financial concerns in the economy. As I expressed in the blogs during that timeframe, there clearly just was not any type of reasonable fear for recession in 2019 and all other major fundamentals of stock market investing continued to be strong. I guess I have to admit that this type of program trading clearly interrupted what would have been otherwise a fabulous investment year and scared our clients into believing that something more dangerous was at hand. Remember that the machines do not trade based on fundamentals; they trade based on momentum. Since momentum and direction were down in the fourth quarter, huge sell programs overwhelmed the market that had low volume and participation during the holiday season and created huge swings both up and down, but the upside was much less regular.

Another thing that really irritates me about the performance in 2018 is that I was not wrong. I correctly assessed the economy and correctly evaluated all of the components of higher stock prices and reported them to you. What I did not and cannot project is how the machines will react to current information. You cannot reason with a machine – it trades because it is programmed to do so, not because of the strong fundamentals of the economy. However, with that said, it gives me a new opening to project strong earnings for 2019. 2018 was a year when interestingly cash exceeded the performance of all other asset classes. That has actually only happened four times in modern history.  

CiCi and Ava on Christmas morning

It is very rare indeed that both bonds and equities would fall in the same year, but 2018 was that year. Interestingly though, when you have that unusual circumstance of cash outperforming other market indexes, it bodes well for strong performance the following year. In fact, average performance in the 12 months that follow cash exceeding all other asset classes have averaged a total return of 15.7%. Even more interesting, there is a 75.9% frequency of those gains actually happening. It does not mean that the market will be 15.7% better in 2019 than it was in 2018, but it does mean that gains we should have realized in 2018 will rollover and be fully transparent in 2019. That is exactly what I predict going forward.

I generally do not like to bog down these postings with lots of numbers that make the readers’ eyes glaze over. However, it is important to understand the fundamentals of investing, something in which the machines have no interest. The major component of valuating whether prices are reasonable is the multiple of current earnings. At the current time, the Dow Jones Industrial Average is selling at a multiple of 13.6 based on 2019 earnings. The Standard and Poor’s index of 500 stocks is trading at 14.5 based on 2019 predicted earnings. Both of those multiples are significantly below the multiples realized over many years of investing.

If you read all of the projections of the eminent disaster that were reflected in the financial news over the last quarter, you would assume that earnings for 2019 would be falling off a cliff. In fact, earnings are actually projected to increase next year, defying those projections that are so often wrong. At the current time, earnings for 2018 are projected to finish out at 156.97 for the S&P 500. Projected earnings for 2019 are currently at 172.10. Simple arithmetic indicates that the Standard and Poor’s corporation is projecting earnings to increase 9.6% in 2019. Certainly, if anyone was forecasting a recession or any type of downturn in the economy, it would be unlikely that this growth in earnings would be realized.

A more normal multiple of earnings over the last 75 years is somewhere between 17 and 18. If you assume the halfway point between those two numbers, which is 17.5 times projected earnings of 172.10, you would be looking at a year-end projection next year of 3,011. If you take the difference between that number and the closing of the S&P 500 on December 31, 2018 at 2,507, you see that the market has the potential to go up 504 points during 2019, simple arithmetic indicates that is a return of 20%. Maybe that is high, but still higher.

Now, is it realistic that the market could go up 20% in 2019? Arithmetic is a set answer, but obviously none of us know what the machines are thinking. If it does go up 20% as projected, I think the more realistic answer would be that this is a two-year return, not a one-year return. Since the machines forced 2018 into a negative year, the rollover of that gain that we should have realized in 2018, along with the gain in 2019, might very well reflect this type of 20% gain in 2019.

Painting of Ava by Stevie Streck, one of our talented clients

Currently, there is a lot being said currently about the worldwide downturn in the economies. Certainly, China is realizing a downturn due to the issues regarding tariffs and internal political issues. If you look at the rest of the world, much has actually improved over the last several years. It has been several years since the emerging markets have been a positive influence for performance. For 2019, I see these emerging market countries will get on firmer economic ground and their stock market performance should improve. I do not see a recession for Europe in 2019, and clearly, China is just at a slowdown and not a recession. If, as I anticipate, the tariff issue is resolved in the first half of 2019 and China uses its economic power to stimulate their own economy, you could see a major upcoming turnaround in Asia. I am very optimistic about the U.S. economy, and in my way of thinking, the world economy will be dragged by the U.S. kicking and screaming. So, I see the 2019 year being extremely profitable in the U.S. and it also looks like the international community could follow. Strictly on a valuation basis, the international markets are cheaper in the United States but as was reflected in 2018, the U.S. financial markets outperform the world markets by a significant percentage.

The most dangerous market in the world might very well be what an average investor might consider the safest. The U.S. Treasury bond market is considered by most to be the safest investment that you could make. Although it is absolutely true that you will get your money back, it is not necessarily true that you can make money on the investment. The most important bond issued by the Federal Reserve is the 10-year Treasury note. On December 31st, that rate closed at 2.686 %, which was one of the lowest rates of the year. Interestingly, as recent as October, the same bond traded at 3.248%, and therefore suffered a significant decline during this 90-day cycle. That type of decline in the benchmark 10-year Treasury is unusual and should be analyzed.

As mentioned above, the machines were heavy sellers during the fourth quarter of 2018. The typical trade would be to sell out of equities and move into Treasury bonds. You saw this occurring during the entire fourth quarter of 2018 when the equity markets moved down and the yield on the 10-year Treasury also moved down. When you have a large demand to buy the bonds, as we had in the fourth quarter, you see the rates move down accordingly. 

What is unusual about this movement of the 10-year Treasury is that the Federal Reserve has actively moved up the federal funds rate throughout 2018 and has indicated a desire to move up twice in 2019. So, the short-term Treasury fund rate is moving up to the mid 2.25% level, when the 10-year Treasury is only yielding 2.686 %. Much has been said this quarter regarding the inverted bond-yield, but my assessment is that this 10-year Treasury is unreasonably low and is likely to move higher. There is no question that the move down in the price of oil has positively impacted inflation for 2019, but in my opinion the price of oil is only temporarily depressed. Therefore, if the 10-year Treasury begins to move higher as I project, many investors relying upon this level of financial security will see heavy losses. I also see that happening in the high-yield bond market, which is vastly overextended, and in other types of investments that rely on interest rates, such as utilities and real estate funds. I am thinking that in 2019 there is a high likelihood of a reversal of rates that would impact all of these asset classes negatively.

You do not have to be a Philadelphia lawyer to realize what occurred in the fourth quarter. A substantial sum of money moved out of equities and into bonds during this quarter. If I am correct and these trades were based upon the quantitative analysis of the machines, the trade is very likely to reverse in 2019 if the market moves higher. It is only common sense that if machines trade on momentum to the downside (as they did in the fourth quarter), there is a high likelihood that the machines will trade to the upside if this movement occurs. In order to exploit that move, they will clearly have to sell bonds to buy equities. While it appears to me that the equity markets are underpriced, I fear the Treasury market might be the real upcoming loser.

From my son, I received the latest book written by John McCain, The Restless Wave, which was written right before his death. I have never been a huge fan of John McCain, and I certainly do not agree with all of his politics, but parts of his book were very interesting. He described in detail the problems in the 2008 election when he ran for President of the United States and the mistakes that were made. It is pretty interesting to hear his reflection on what we on the outside perceived as being total chaos. He also went into detail regarding his sickness, which ultimately led to his death last year.  

The only reason I mention this book is that there is a section on immigration that is worthy of your reading. It is a mystery to me why politicians cannot get this very important subject under control. I recognize the fact that the Democratic Party would prefer that we have open borders, not for any reason that makes sense to me other than it is assumed that such a minority would vote Democratic, and therefore it would be beneficial to their political goals. On the other hand, Republicans are just as obstinate on the subject, refusing to accept the fact that many of the illegal aliens that are living in this country have been here for at least a decade and are hardworking, taxpaying citizens. It is hard to believe that the two parties cannot reconcile these opposite opinions, so we continue to have total chaos on the border where the laws are uniformly ignored and the politics make matters worse.  

For those of you who do not recall history, one of the staunchest Republicans of all time issued a blanket amnesty in 1986. Ronald Reagan realized that it would be impossible to deal with immigration issues since many of the undocumented immigrants had been living in the United States for many years. Even though he supported tough immigration laws, he realized that dealing with the people that were already residing in the United States could only be dealt with where they would register and become citizens based upon several criteria. At that time, it was believed that there were 4 million illegal immigrants living in the United States and roughly 3.2 million of those applied for immigration with various levels of success.  

Today, it is believed that there are 11 to 12 million unregistered immigrants in the United States at the current time. The problem since 1986 is that the enforcement of immigration has basically been a joke. There are certain administrations that have practically ignored the laws, and then there are certain cities that allow for sanctuaries for illegal immigrants, even though they are clearly in this country unlawfully.  

Regardless of how you feel about the matter, at some point, we have to deal with the issue. I thought John McCain had a very reasonable explanation that might actually work. Essentially, it allowed undocumented workers that had already been here for 10 years, that had not committed any crimes, to apply for citizenship, pay back taxes, and basically to get right. There was also a very interesting part about a temporary work permit. Basically, this work permit would allow for a three-year trial period whereas they could work in the United States and be accounted for, but would have to return after three years. I am not exactly sure why this plan did not pass in Congress, but it certainly seems to be a reasonable approach to the immigration issue in America today.

One of the most annoying aspects of immigration to me is that we really do not even attempt to deal with the issue. We all know that there are millions of undocumented workers in America that are hardworking, taxpaying citizens. Of those millions, the number that are criminals and against the American public is a small percentage. It would not be that difficult of a matter to close the borders to future immigration, but dealing with the people that live here would be a monumental feat. What is more baffling than all of that is the inability for Congress to even have a basic discussion on the topic. If you get a chance, read these few chapters on immigration and see if you agree with the policy that is laid out. I am sure the hardliners would say no amnesty under any circumstances and the liberals would offer blanket amnesty. Obviously, the answer is somewhere in between and must be addressed from a system that is fair, yet can administratively be dealt with.  

Despite being a steadfast conservative, even Ronald Reagan realized that a compromise to solve the issue was required. Designing of the immigration amnesty was revolutionary in its concept and application. At least Ronald Reagan had the good sense to compromise on the matter. However, enforcement of the laws is worthless if we do not stop illegal immigration.  

There will always be illegal immigration in this country, as there has been since the beginning of time. It is good, it makes us better and certainly the laws exist that would allow it. What we cannot deal with is open borders where anyone can enter the United States at will, without authorization. Maybe the bill that John McCain proposed would actually accomplish that goal.

I am very optimistic for 2019 – not based on what I expect the machines to do, but rather on the fundamentals. You cannot invest based on the wild fluctuations that the machines bring us. Over time, fundamentals always win, and currently, the fundamentals are quite excellent. While we certainly have no way of knowing what will happen when the machines start to do their thing, as was evident in 2018, we do know that eventually fundamentals will outperform all other types of valuation of future stock prices.

As always, we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Why Would Anyone Invest with any Advisor That is Not a Fiduciary?

I have wanted to write extensively on the title of this posting because I consider it to be of the utmost importance. Everyday I think to myself that there are so many investors losing out on one of the greatest bull markets of all time. With the stock market up over 20% in 2017, and up almost 10% so far in 2018, so many investors have wasted a once in a lifetime return with financial advisors that do not have their best interest at heart. I will continue this discussion in greater detail later in this posting.

Lucy & Harper Wilcox

Lucy (6) and Harper (8)

Eddie Wilcox and wife, Jennifer

Before I discuss that topic, I have to discuss the extraordinarily good month of August 2018 from an investment standpoint and once again emphasize the strength of the U.S. economy and why markets are likely to continue to advance even after they hit all time highs in August. The economy at the current time could not arguably be better. GDP was adjusted higher for the second quarter and unemployment actually ticked down. Corporate earnings are now exceeding the 20% year over year estimates and the consumer has the highest optimism levels in over a decade. What is even more important is interest rates continue to be unbelievably low, despite being higher this year, and inflation is moderate. All things considered it is the perfect Goldilocks economy.  Not too hot, not too cold - just right. 

For the month of August, all the major market industries posted all time highs. The Standard and Poor’s index of 500 stocks was up 3.3% during August and up 9.9% for the year to date in 2018. The one-year period it reported an excellent 19.7% increase. The Dow Jones industrials average was up a more moderate 2.6% during August and it is up 6.7% for the year 2018. For the one-year period it is up 21%. The real winner during the month of August was the NASDAQ composite, it was up 5.8% in August and is up 18.3% for the year 2018. For the one-year period the NASDAQ composite is up a sterling 27.4%. For those of you that continued along investing in bonds, the Barclays Aggregate Bond Index was up 5% during the month of August but has a negative return for 2018 at -1.2%. For the one year period that index has generated a loss of 1.3%. As you can see any investor that has a significant allocation to bonds is not even coming close to generating a return as high as the underlying rate of inflation.  

Due to the new highs being reached in the markets, a great deal has been said in the press lately regarding the potential for a huge decline in the stock market. I am not sure where the naysayers are finding their research on this subject since it is not supported by economic facts. Yes, it is true that the major market industries have hit all-time highs, but the market, by any measurable standard, is not overpriced. Due to the huge increase in earnings that U.S. corporations have realized over the last several years, the P/E ratio is still maintaining historically moderate levels.

If you look at the current earnings for the next 12 months, the P/E ratio for the Standard and Poor’s Index of 500 stocks is only at 17. If you evaluate the last 4 decades of investing you will find that, on average, 17 is the standard valuation represented by this index. So, when your neighbors or friends tell you the market is overvalued, ask them exactly what standards they are using to make this determination.  In every decade since the 1920’s the average P/E ratio for the S&P Index has been 17, precisely where we are today!

About 90 days ago, there was much discussion in the press that the inverted bond yield would in fact push the economy into recession sooner rather than later. However, not many people have mentioned lately that the 10-year Treasury has actually declined, hovering around the 2.8% range over the last 90 days. There is actually an economic reason for this lack of movement, although the Federal Reserve continues to push short term rates higher. What we are seeing is a moderating inflation cycle that has not exceeded the 2% threshold as mandated by the Federal Reserve. But more importantly, there is a huge drag on interest rates by the 10-year Treasury rates in competing countries. If the Federal Reserve pushed up rates too high, money would flow out of foreign currencies into the U.S. dollar, hurting their economies and making their currencies less competitive. Trust me; I don’t think the Federal Reserve has any intention of creating that chaos and is likely to only make one more increase in 2018. 

It is amazing to me that I have to explain to people how well the economy is doing. You do not have to look far to see all of the construction cranes in Atlanta; and good luck trying to get reservations at your favorite restaurant. Have you noticed that traffic is terrible everywhere you go, at all times of the day? I drive by the full parking lots of Lenox Square and wonder to myself why anyone would be inside a mall on a beautiful Saturday afternoon.  

The department of labor has just announced that the unemployment rate continues to be below 4%. The economy added 201,000 jobs during the month of August, which by all historic standards is a very slow month for employment. As I have pointed out in these pages for many years, the more people you have working in America, the better the economy will be. With more jobs you will see the economy pick up in every respect and right now we are above full employment in America. If you want to know how strong the economy is you have to realize that U.S. employers have added to payrolls for 95 straight months.  This is the longest extended job expansion in the history of the United States. Also, it was reported that manufacturing activity in August expanded at the strongest pace in more than 14 years and U.S. corporate profits boomed in the second quarter. I am not sure exactly what type of evidence that you would need to accept the reality of the strength of the economy, but those statistics are pretty compelling. 

There is no question that there is economic uncertainty in the emerging markets and of course in the world’s smaller economies. Much of this uncertainty and the decline in value is a direct result of the issue with tariffs. However, from a true economic standpoint, the cheapest markets in the world today are Asia and the other emerging markets. They are however, not investable at the current time since the momentum traders continue to create economic chaos by forcing these stock markets down. The traders have neither the capital nor willpower to stay in these trades forever. Even though the emerging markets have incurred 5-6% losses over the last 90 days and are today trading down -7% while the S&P is up 10 %, it will be a quick rebound. Obviously, no one knows exactly what date this rebound will occur, and we are better off not investing in those markets until it does.  I’ll bet that you will see the emerging markets rally late in 2018.

The month of August was an excellent month financially, but the more new clients I began to see coming in, the more I questioned why anyone would entrust their hard-earned money to an advisor with no fiduciary responsibility. I see so many cases of new clients who have been taken advantage of by previous advisors, and yet people out there continue to invest with non-fiduciary advisors. Many of these large brokerage houses and banks do not have your best interest at heart; they invest your money in investments that benefit them more than you. It just baffles me that anyone would take that risk, and I intend to cover that matter later in this posting. 

Ava at the beach, age 7

Carly Kramschuster at the Braves game

Let me give you a couple examples of what I have seen over the last few years with new potential clients. I had a lady come in recently who was 72 years old. She had absolutely no knowledge of the financial markets and no real understanding of what was going on with her money. However, at 72 years old she was fully retired and expected to live off of her retirement money. She, like many others, was scared to death of investing in the stock market and was therefore drawn in by an advertisement from an insurance company that guaranteed her 6% for the remainder of her lifetime.  

She had no idea exactly how this annuity worked and gave me the actual document to read, which ran close to 100 pages. This lady was 72 years old, but the annuity provided that for the very first 10 years of the annuity she was not allowed to touch it. Therefore, her money was tied up from age 72 to age 82, during a time where she desperately needed the cash flow for her monthly needs. This is an example of how insurance agents take advantage of retired people. When you think about it, after the money has sat for 10 years, the commitment to pay 6% over time is hardly a stretch for even the worst investors. The lady decided to cancel the annuity so she could have ready access to the money and transferred it to another form of investing, incurring a penalty of roughly $60,000.  

We had an unfortunate situation where a husband died tragically early, but fortunately for his wife and family he had roughly $1.5 million in life insurance. Six months after making this transaction, with annuities from the insurance company, the widow realized she had no opportunity to spend the funds that were to be her livelihood after his death. After a while, she determined that the annuity was impossible to live on based on her cash flow and agreed to take a $150,000 penalty for canceling the policy. Another example of why these types of deals should be illegal... Did the agent really have the widow’s best interests at heart?

We had two clients in recent weeks that had very large government pension plans. If you think about it, a government pension is much like a fixed income portfolio since it pays out for life at a reasonable rate of return with no volatility. It also goes up annually with inflation so it is a wonderful hedge against future expenses. In addition to their wonderful government pension, they had $500,000 or so in fixed rate investments. If you put that on paper, you would quickly see that virtually 100% of their money was in fixed income, with their investments earning next to nothing over the past few years. This is a classic case of an investment advisor who did not understand a client’s entire finances and recommended investments that benefitted him more than the client. Once again, a prime example of why there should be a regulation to keep advisors from taking fees from products they sell to clients.  

Recently, I had a very distinguished couple come into my office who lived entirely off of their investments and social security. They had roughly $500,000 invested with their local bank manager. I asked if I could see their investments and found that every dollar was invested in tax-free municipal bonds. Of course, over the last few years as the interest rates have been rising, they have made no money whatsoever on their tax-free bonds. This led me to wonder whether they had a substantial tax problem and thus the need for the bonds. When I looked at their tax return they had zero taxable income and had not paid any income taxes over the last decade. This type of poor advising of the clients is the reason we put so much emphasis on taxation in our investment plans.  

Shortly after I started my business in 1980, I would get up every morning, get fully dressed, and sit down at my desk. I only had a few clients and not much to do, so the highlight of my day was when the Wall Street Journal arrived in the mail. By that time it was 2 days old, but it was still news to me. There was no internet and obviously no financial news programs on television. You had to get your financial news the old fashioned way: the newspaper. I would study the Wall Street Journal from cover to cover, reading virtually every article regarding investing and tax matters. It would literally take up the majority of my day, right up until 4 o’clock when M*A*S*H would come on the TV. So, my day would be occupied by reading the financial news and enjoying the Korean War again for basically 10 hours a day. Needless to say, I have seen every M*A*S*H episode that was ever made.

One day, I received a phone call from my “friend” at Merrill Lynch. He indicated they had a unique opportunity that he thought I should invest in. Basically, it was an orange juice manufacturer near Tampa with its own groves that processed orange juice for wholesale. Since my “friend” had recommended it, I elected to buy 1,000 shares at $6.50 per share, which was a world of money to me at that time. Since I was new to investing, I had no knowledge of the conflicts of interest that major brokers legally practiced. With great anticipation, I was sent the confirmation of my purchase and watched it daily in the coming weeks and months.  

After about two months, the stock began to fall. I called my broker to find out if there was some negative news I should be aware of, and he indicated no, everything was fine. On the 90-day anniversary, my outstanding stock was now down to $3 per share, losing more than 50% of its value. At that time, I decided it was time for me to find out exactly what was going on. It was not like I had anything else to do, so I booked a flight to Tampa to attend their annual meeting and see exactly what the company was all about. Clearly, I should have done this prior to investing, but again, I was a novice and learning as I went along. 

At the annual meeting, the president of the company strolled in; I vividly remember that he was wearing a yellow seersucker suit and was smoking a cigar. To this day, he is still the most obnoxious host I have ever been around in a public setting. He refused to answer questions from the audience, dodging any inquiries into the company’s financial standing. After the meeting, I did an analysis of the financial statements. I found that while the orange groves were on the balance sheet of this public company, they were actually purchased by him personally and he was draining off most of the company’s profits through rent of the actual groves themselves. This was a clear conflict of interest with the business and even I, the proud owner of a mere 1,000 shares, could see it.  

I mention this story, not to explain how I lost money since I eventually sold the stock for about $1 per share, but rather to point out the conflicts of interest that play a major part in non-fiduciary brokers’ and bankers’ income stream. I found out later that Merrill Lynch was the underwriter of this particular security, meaning they billed large sums for providing this service. At that point, they turned over the security to their retail brokers and instructed them to call on their best clients and sell out the inventory of the underwriting. By virtue of ten thousand brokers calling their clients across the United States, there was an immediate demand as Merrill Lynch sold off the shares from their inventory. As you would expect, after the entire inventory was sold there was little demand for the stock. The volume collapsed since Merrill Lynch was no longer selling or buying the stock and it ultimately failed, dropping to an almost worthless value. 

If you have ever wondered why your broker calls and asks for your permission to buy or sell a particular security, there is a specific reason. Unless they are operating as a fiduciary, as we are, they need your permission to do so. And because they receive commissions on these trades, they clearly need your consent. In addition, they have the authority to lend your shares to short sellers and basically treat your shares as their own while it is held in their accounts. This brings me back full circle as to why you would ever make an investment with any broker or advisor that did not have a fiduciary responsibility to you. My “friend” at Merrill Lynch was never my friend again.

You would think that this concept is so basic in nature that I would not even have to ask that question. It really all comes down to “Do you trust your advisor,” and “Who is truly benefitting from your invested dollars?” If you buy an annuity or life insurance policy with a huge upfront commission, you need to understand that the product you purchased paid a large fee to the person who sold it to you. You should never have to question whether a recommendation from your advisor is better for you or for them. If you are dealing with an advisor that is a fiduciary, you will never have to worry about this matter since no commissions are ever paid to them on investments made.  

One of the basic concepts of our practice when I set it up in the late 1980s was that I wanted everyone to know that we would never take a fee of any kind from anyone but our clients. We have no financial relationships with the custodians, the mutual funds, etc. The only payment our firm receives is from our clients - never a third party. A concept as simple as this should be established by any major advisor. Unfortunately, people on a daily basis entrust their hard-earned retirement money with advisors that benefit directly from the investments themselves and not from their clients.  The lesson to be learned here is, never invest your money with any advisor that is not a fiduciary. 

We encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Tax Cuts & Jobs Act

As everyone is aware by now, President Trump signed the tax reform package into law last Friday. While the tax bill contains numerous provisions, we wanted to pass along only a few key items to consider for 2017 and 2018 that may affect some or all of our clients. And you only have a few days of 2017 remaining to take advantage of a few key strategies to wrap up this tax year. Here we go!

• In 2018, the estate tax exemption is jumping from $5.6 million to $11.2 million per person. That is a significant hike and can be transferred to your spouse upon death for a collective estate tax exemption of $22.4 million. Get out there and buy those lottery tickets! The annual gift exclusion will be $15,000 per person per recipient in 2018.

• The standard exemption is almost doubling in 2018. For single filers it will be $12,000 (from $6,350) and for married couples filing jointly it has increased to $24,000 (from $12,700). This increased standard deduction will definitely benefit those of you are that are unable to itemize, but even those of you that used to itemize may find that the new standard deduction is higher than your itemized deductions. If you think you will be using the standard deduction in 2018, you likely will want to accelerate your charitable contributions into 2017 to take advantage of that deduction.

• In 2018, Schedule “A” miscellaneous itemized deductions – typically unreimbursed business expenses for W-2 folks, investment management fees, and tax return preparation expenses, including distributions – are not allowable.  Consider pre-paying those business expenses and fees now if you typically receive a deduction for them. Thanks!

• In 2018, Schedule “A” state and local income tax and property tax deductions are limited to $10,000. Therefore, we would encourage all of you to be sure to pay your 4th quarter state estimated tax payments and 2017 property taxes BEFORE the end of 2017. This will at least allow you the benefit of potentially taking advantage of a deduction for these items during 2017. If you still owe Fulton County or City of Atlanta since those property tax bills came out so late this year, pay them now rather than in January.  If you escrow those payments, call your mortgage company and request that they be paid now.

• Mortgage interest deductions are limited to $750,000 of principal residence and second home debt. This debt limit was previously $1,000,000 with a home equity line kicker of $100,000. There is no longer a home equity line kicker. Therefore, if your debt is greater than $750,000, you might consider accelerating a mortgage payment or two into 2017 to take advantage of that interest deduction.

• Several of the seven tax brackets have been lowered for 2018. In that regard, we would recommend deferring business income for the next few days if possible. There is also a very complicated pass-through entity business income deduction that may be beneficial for some of you with flow-through entity income.

• The electric car credit expires at the end of 2017. If you are considering a purchase, you have 4 days to complete the sale!

• 529 accounts can now be used to save for elementary, secondary and higher education. Consider making contributions and having family members make contributions. The amounts that you can withdraw for lower level education are limited, so please discuss with us before doing so. Fund your 529’s now!

• There will be no more exemption allowance in 2018. Some of you had this phased out already and are used to not having this exemption allowance, but those of you with children that did not have this phased out will likely see an increased child tax credit. It will double from $1,000 to $2,000 per child under 17 years of age. And it will be available to more filers as the income threshold to receive the credit has increased for joint filers who make up to $400,000.

• Likely a lot less of you will experience the AMT in 2018 when the exemption amounts and the phaseout thresholds have been increased.

• Accelerated bonus expensing of qualified business property purchases has been expanded to 100% of property placed in service through 2022 on new or used property.

• New C Corporation tax rate is a flat rate of 21% in 2018 and no AMT.  

The above information constitutes a very limited summary of some of the key provisions in the new tax reform bill along with our recommendations for possible key items to make sure you do over the next few days given the changes. Please contact us directly for questions if you feel you have a specific situation that has not been addressed above. We look forward to working with you during 2018 and wish you all a very happy new year!  

Best Regards,
Danielle Van Lear

Really, Why are You So Worried?

It never ceases to amaze me the level of concern that investors get over the slightest bit of short-term economic news. In the 40 years that I have been doing this, I have never really understood why investors get so concerned over an event that will affect the market over weeks or months, when in fact they do not need the money for years and years. Just exactly what difference does it make if the market goes down next week if you do not need the money until a decade from now?  

When I first began in the investment business, the market fell 22% on one day in 1987. On that day, the Dow Jones went from 2202 to roughly 1700, and today it is close to 18,000. If you were to look at a chart from 1980 through 2016, you would note that the 1987 downdraft does not even appear in the graphic. It is just one continuous straight line up. For that 36-year period, the average gain is roughly 9% per year.

Yet, every day I talk with investors who seem to have a great deal of inner conflict about investing for one reason or another. I do my best to try to explain the basics of economics but quite frankly, in most cases, investors who have a preconceived notion cannot be convinced otherwise under any circumstances. Often times, their anxieties are based upon information from tabloid headlines. “The world is coming to an end”, “life as we know it will change”, “social security is bankrupt”, “the U.S. dollar is worthless”, and many more of which I will not bore you. I only wish I could invoke common sense when it comes to analyzing these outrageous tabloids designed to sell an agenda of one sort or another. Hopefully, I can help you to better understand these issues, and therefore invest better going forward.

Before I jump into the fun stuff, I thought I would share a few pictures of Robby and Danielle, two of the partners here at Rollins Group, with their family.

Reid, Robby, Danielle and Caroline

Reid - Age 1

Caroline - Age 2 1/2

The month of August was basically a “nothing” month from an investment standpoint. For the month of August, the Standard & Poor’s index of 500 stocks was up a minuscule 0.1%. However, year to date, it nobly stands at 7.8% and one-year total return at 12.5%. The NASDAQ composite was up a satisfying 1.1% for the month of August and up 5% for the year. It too has a double-digit one-year return at 10.5%. The Dow Jones industrial average was also up 0.1% for the month of August, up 7.5% for the year and up 14.2% for the one-year period. In comparison, the Barclays aggregate bond index was down 0.2% for August, up 5.7% for the year 2016 and also up 5.8% for the one year period ended August 31, 2016. While certainly not outstanding returns, given the historic bad performances of the month of August, I would have to consider the fact we did not lose any ground as a positive.

As many of you know, the ideal time for investing in the stock market is the period of November through May of the following year. So far in 2016, we have had a very satisfactory year from an investment standpoint, and yet we still have the best time of the year to look forward to. Therefore, I thought I would just cover a few subjects that seem to perplex every one when it comes to investing.

There is no question that the economy slowed down during the month of August, and therefore it is creating some level of concern among investors. If you were to exercise even the slightest bit of common sense, you could easily explain this phenomenon. Given that virtually all schools are back in session prior to the end of August, would it not seem reasonable that there were a lot of people not working during the month of August for vacation and family reasons. Look at Europe, hardly anyone works in August. The fact that business slowed during the popular vacation month of August should come to absolutely no one’s surprise; however, it seems to always do so.  

You may remember that during the month of February, the market sold off ten percent under the presumption that the slow economy meant a recession was surely around the corner. As I explained at that time, the economy is always slows in the winter, for reasons that are so obvious that I do not even need to repeat them. Contrary to the belief of the many investors who sold off, the economists did not know what they were talking about. And, of course, the market bounced back quickly and the dire reports of a slow economy were once again an error in judgment as they did not even bother to consider the time frame at which it actually went down.  

I guess you also remember that the market dropped another 10% when Brexit was announced. Do you remember how you read those headlines about how surely Europe would be transformed and the world as we know it would change going forward? As I explained at that time, Brexit would not even come into play for another several years. Here we are now, some five months after the Brexit vote, and absolutely nothing of any kind has taken place. As I have pointed out before, the British may be one of the most methodical and slow-moving democracies of all time. Do not expect anything to happen in this regard for many years to come. Even with those absolute crystal clear facts, investors still became concerned and sold. Once again, the market quickly recovered and went up even further. Wrong again!

I often quote the famous investor Peter Lynch of the Fidelity Magellan Fund. “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has ever been lost in corrections themselves.” How good of an example of that fact do we have today? Yes, it is true the market crashed in 2008. However, in the last 14 years, the S&P has been up 13 years and yet everyone is trying to gain an advantage and trade for the ultimate market crash. A 93% win rate seems pretty good to me, yet some investors still do not seem satisfied.

I wish many investors would just use facts. Sometimes, “intuitive” knowledge leads to incorrect decisions. For example, every single day over $1 billion in new money is invested in stock market investments through 401(k) plans. This money comes in consistently, regardless of market conditions. Yes, it is true there is money also going out. If nothing else, this new money buying investments alone supports the market and puts the floor on the downside. Yes, it is true that traders would like to scare you out of your positions, but believe me, they are much more scared of this flood of new money coming in than they are concerned about market volatility, since it affects their livelihood. 

While we hear negative publicity every day about an economy that is stalled, did you realize that for the month of July, the savings rate in the United States was up a sterling 21.28% year-over-year. Let me emphasize that again: we are talking about a savings rate in a country, which historically has not saved enough. It would seem to be relatively obvious that savings rates would not be going up if employment was not secure and people did not have excess money to spend.  

The empirical evidence on the subject is everywhere. Automobile car sales are up gigantically over the last few years. Building contracts continue to soar, new housing starts are dramatically higher and residential spending continues to set new records. Given the now famous S&P Case– Schiller index of home prices is up 4.28% over the last year. If you have a calculator, just calculate the value of every home in the United States, multiplied by 104% year-over-year. As wealth is built through the stock market, homeownership and job security, Americans are able spend more money on cars, homes, vacations and everything else in between.

Now let us look at the numbers regarding employment. 2.5 million Americans are working today that were not working one year ago. Yes, it is true that the participation rate is low at 60%, but I suspect a lot of those not working are doing so because they do not have a need to work due to other financial reasons. However, every working American creates a group of people (spouses, children, relatives) who are supported by their work. If you do not believe that 2.5 million new Americans working over the last year who were not previously working does not increase the economy and GDP, then you really do not understand basic arithmetic. Consumer spending is at an all-time high – have you heard that lately?

Okay, let us assume that you are the cynic and that unemployment at 4.9% is not correct, but rather the U-6 unemployment calculation of 9.7%. As you know the U-6 unemployment takes into play part-time people and people that cannot work full-time for one reason or another. Over the last one-year period, that ratio was down a sterling 5.83%, and therefore even that negative unemployment report is improving. People are working which helps the economy.

The fear is that the Federal Reserve will increase interest rates thus throwing the economy into recession, and therefore creating a negative economy going forward. Too often I watch the financial news and shake my head in bewilderment at some of the statements they relay. Let us really take into perspective exactly that particular point and consider the ramifications. First off, interest rates are at a historic low, and have been for years. Any rate increase would still be below the previous historic low, and therefore does not really make any difference to stock prices anyway.

Also, I need to point out again that in Europe, especially in Germany, we already have negative interest rates. Currently, if you loan money to the German government, at the end of 10 years, you actually get back less than you originally loaned. And if you think that is an isolated example, one of the largest economies in the world, Japan, has exactly the same negative rate of return. Maybe you did not realize it, but this week in Europe, major corporations were issuing bonds to investors with negative interest rates. Not governments, but regular corporations. These companies are so incredibly secure financially that they can get people to basically loan them money for free. Does that sound like an environment in which the U.S. could increase interest rates?

What happens if the U.S. increases interest rates in the face of these economic sectors that create negative rates? First and foremost, the dollar would go up and international currencies would go down. That creates an economic boom for the overseas economies in that they have a more competitive dollar to sell goods in the United States. It also creates a negative in the United States in that the dollar strengthens and therefore we could not compete in international economies due to the higher dollar. Really, why would our Federal Reserve ever want to create a situation where they would make U.S. manufacturers less competitive?

It is very important that you understand the double mandate of the Federal Reserve in order to understand interest rates. The Federal Reserve was created basically to avoid inflation. In recent years, they have received a lot of publicity regarding the double mandate of low inflation and full employment. Although the financial news criticizes them for trying to manipulate the economy, you have to evaluate whether they have been successful or not. Currently, the unemployment rate is 4.9% which by all definition is full employment. Have you actually looked at inflation lately? Right now, the producer price index over the last 12 months is down (2.49%). The rate of inflation today is 0.8%, which is less than 1%. Based on that double mandate, the Federal Reserve has its full employment and low inflation. Therefore, there is no reasonable cause for an increase in interest rates, and due to the international constraints of lower rates, you may rest assured any rate increase would be small and not detrimental to the economy.  

So once again, I sit here today trying to understand the philosophy of investors. Yes, I want to be tolerant and receptive to investors’ ideas but I also want to be realistic. I want to sit back and evaluate the economy and try to figure out, based upon what I know and see, whether the economy is good or bad. Perhaps you have not seen the acceleration of home prices that is occurring throughout the United States. Try to get a contractor to do work at your house at the current time. Why are the skies full of cranes building commercial real estate? Try to get a reservation at one of the finer restaurants anywhere.

It does not take an economist of special knowledge to notice that supply and demand is pushing the economy forward. Consumers have money to spend and they are spending it on things that increase the economy. The Atlanta Federal Reserve puts out one of the most respected GDP forecasts in the United States. Today, they are forecasting that the third quarter ended September 30, 2016 will have a GDP growth of 3.5%. We know that interest rates should remain low for years to come. Going forward, for the higher GDP and lower interest rates, corporate profits will continue to rise. As I write this September posting, we have a trifecta of good news: higher profits, better economy and low interest rates. I am absolutely sure that I have no idea what is going to happen in the market next week, next month or next quarter, however, with a high degree of confidence, I can assure you that ten years from now, when you need your money, the market will trade dramatically higher than it is trading today.  

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins

Timing IRA Contributions

This week’s blog is similar to one we ran as part of our Q&A series a few years ago. We often have clients who question our reasoning for making IRA contributions as early as possible, so I would just like to reiterate our stance.

In the past, many of you have received some form of communication from Rollins Financial suggesting you should make an IRA contribution early in the year. Many undoubtedly wonder, “What’s the rush?” Although you actually have until the tax filing deadline of the following year to make your IRA contribution, we find it to be in your best financial interest to make the contribution on the first business day of the year (which for 2014 is January 2nd).  

As many of you know, stocks do not rise in value in a straight line. However, during 2012 and 2013 there was not a single day during either year that the S&P was negative in YTD performance. This means the best time to have invested was, in fact, day one! Granted this is an unusual situation, and if we actually knew ahead of time the best day out of the 15½ month window to make your IRA contribution, we would obviously suggest you make it on the day when investments are the cheapest. Unfortunately, no one can predict when that day will be. And if they could, they surely would not be reading this blog (or writing it for that matter).  

That being said, let’s focus on the likeliest scenario. Stocks have produced positive annual returns in approximately 72% of the calendar year time periods since 1926. The probabilities suggest that there is value in contributing as early as possible. And here’s why….  

As an example, let’s make the following assumptions:  

• Our Expected Return is 8% annually (some years will be higher and some lower, but we’ll expect this average over the next 35 years)

• Each Participant will make an annual lump sum contribution of $5,500 to their respective IRA

• Each person will retire at 65 (we’ll use this as the year end age)

• This is their only means of savings

If we make the noted assumptions, you can see the results in the following table: 

After reviewing the table, you’ll notice the savers, who choose to invest their IRA contributions at the beginning of the year and are exposed to the 8% return for the entire year, will realize higher returns. The 30 year old who contributes and invests for 35 years realizes total returns of over $75,000 more by making his/her contributions early in order to gain the full benefit of each year’s returns. The 40 year old is better off by nearly $32,000, and finally the 50 year old who has only invested for 15 years has nearly $12,000 more than if he/she had waited and contributed at the end of the year.

I also performed the same test for those of you who can contribute to a SEP-IRA. Since SEP-IRA contribution limits are much higher, the potential benefits are also greater when making early contributions. Let’s start with the assumption that a 40 year old with 25 years until retirement can contribute $30,000/year annually to a SEP-IRA. This hypothetical investor could end up with an IRA balance at retirement containing an additional $175,000 in value by making his/her SEP contributions at the beginning of the year vs. waiting until the tax filing deadline to make the contribution.  

What’s the moral of the story here? Be proactive! Make the most of your annual IRA contributions; don’t wait until the end of the year or until the filing deadline in April to make your contribution.  

Thank you again for visiting RollinsFinancial.com and we hope you have found this information useful. Please feel free to email us and provide us with your thoughts and comments.

Best regards,
Eddie Wilcox, CFA, CFP®

No One Warned Me That Old Yeller Was Going To Die!

With the excitement surrounding the recently released movie version of “Marley & Me,” I couldn’t help but be reminded of going to see “Old Yeller” when I was a young child. I’ve been a Labrador retriever owner virtually my entire adult life, which I’m sure is from seeing Old Yeller’s loyalty to the Coates family in the beloved film. There are only a few films from my childhood that actually left an impression on me, but “Old Yeller”is certainly at the top of the list.

Growing up in rural Tennessee, our family had one small, black and white television set with rabbit ears and terrible reception. We watched the “The Wonderful World of Walt Disney” religiously, and one of my heroes at age 8 was Fess Parker who played the title character in the “Davy Crockett”Disney television series. You can imagine my excitement when I heard that Fess Parker would be starring in the Disney-produced “Old Yeller.”

In the 1950’s, going to the movie theater was an all-day experience. No one really worried about when a movie was scheduled to start or end; we simply went to the movie theater and stayed almost the entire day, watching not only the marquee movie (sometimes over and over again) but also the various film shorts and previews.

I hadn’t read Fred Gipson’s novel, “Old Yeller,” prior to going to see the movie, so I had no idea what the story was about. The main draw to the film for me was that Fess Parker was in it. Because it was produced by Walt Disney, I had my father’s stamp of approval to go see it. I can remember my father dropping me and my brother off at the movie theater one Saturday for a day of “movie madness,” and I also remember him giving each of us $1 to last us the entire day. The ticket to get in was a whopping $0.25, and the remaining $0.75 had to be carefully budgeted to buy our junk food and sodas throughout the afternoon.

“Old Yeller” centers on the Coates family, rural Texans who are very poor. One day when the father, played by Fess Parker, is away on a cattle drive, they receive an uninvited visitor, a scruffy “yeller” Lab mix. Yeller proves his loyalty to the family time and time again by saving them from frightening situations. One of the boys, Travis, grows especially close to Yeller, despite having been somewhat skeptical of him when he first showed up at the house.

Near the end of the film, Yeller develops rabies while protecting the family from a rabid wolf. Travis realizes he must protect his brother and mother from Yeller, who has started showing signs of madness from the rabies. In a heartbreaking scene, Travis tearfully shoots and kills Yeller.  Did you cry, too, when you first saw “Old Yeller”?  

In an effort to cheer-up Travis, who is devastated from the death of his beloved dog, he is given a puppy sired by Old Yeller. Travis initially refuses, but after his father explains the circle of life, he accepts the puppy, naming him “Young Yeller.”

Watching “Old Yeller” again recently, I noticed that the film would be considered amateurish by today’s standards. However, the story is just as moving now as it was back in 1957, and the climactic scene where Travis kills Old Yeller and makes his first step towards manhood is just as emotional and timeless. I may not have known Old Yeller was going to die when I first saw the film 52 years ago, but its rawness was still a jolt to my emotions when I watched it again the other day.

As an aside, I didn’t remember Chuck Connors being in “Old Yeller,” and I was surprised to discover that he had a role in the movie. After “Old Yeller,” Connors starred in “The Rifleman,” quickly becoming another one of my heroes. Connors had been both a professional basketball and a baseball player, and he is one of the few athletes who was able to play two professional sports successfully.

In the ABC series, “The Rifleman,” Connors played “Lucas McCain.” I vividly remember asking for a toy rifle (a politically incorrect toy for a child nowadays) just like Lucas McCain’s for Christmas one year. Similarly, several years after Disney had made Fess Parker a star in “Davy Crocket” and “Old Yeller,” he was cast in Fox television’s “Daniel Boone.” Oddly, the Davy Crocket and Daniel Boone characters both wore coonskin hats and carried big knives, making me forever mix-up the television shows… 

Like “Old Yeller,” “Marley & Me” tugged at my dog-owner heartstrings. Before watching the film last night, I had actually read John Grogan’s memoir of the same name. In it, Grogan details the 13 years he and his family had with the boisterous and sometimes destructive yellow Lab named Marley and the invaluable lessons they learned from him.

After all my years of owning and breeding Labs (Daisy’s two litters totaled 20 pups!), I can relate to Marley’s various shenanigans and how his sometimes wild behavior and undying devotion impacted the family. I can also relate to the grief felt by the family after Marley’s death from old age. Truly, the only downside to owning a dog – even a nutty dog – is that they have such a short lifespan.

The movie version of “Marley & Me” is very good, although there are some differences between the film and the book. Grogan’s memoir details Marley’s neuroses quite explicitly, many of which would have been difficult to translate to film. However, the movie is still excellent, and even though I knew the ending, it didn’t make it any less sad to watch.

Just like no one warned me that Old Yeller was going to die in 1958, no one warned me that 2008 – 50 years later – would be such a devastating year for the financial markets. But the financial news was not nearly as bad as what the media was reporting, and I continue to be in the camp that believes much of the Wall Street carnage increased due to all the negative news being reported by the media.  But whatever the reasons, 2008 was undeniably a tumultuous and wealth-endangering year.

As the 2008 year came to a close, the Dow Industrial Average finished down 31.2% for the year. The Standard & Poor’s Index of 500 Stocks was down 37%, and the NASDAQ was down 40%. OUCH! There’s no way to sugarcoat the terrible performance for the year; it was, in a word, devastating.

The 2008 investment year can essentially be summarized very simply. In 2008, there were only two classes of assets that made any money: cash and Treasury bonds.  Everything else lost money, and in many cases, in a big way!  

As I have previously explained, in every other year of investing, asset managers would typically move to a higher position in fixed-income assets to accomplish less volatility in a portfolio. But in 2008, that strategy did not help. Bonds, like stocks, suffered losses in the double-digits. In many cases well-respected long-term bond funds lost close to 30% for the year, and therefore, only cash and Treasury bonds seemed to offer any buffer to the sell-down that occurred (principally in the 4th quarter of 2008).

I truly believe that things are getting better now for the financial markets. I’m not implying that the economy is getting better, but as I’ve pointed out before, it’s not necessary to wait for the economy to recover for stock market performance to improve.  In fact, there is even a general air of optimism being reported in the news! I don’t know whether this has to do with the incoming Obama administration, but quite frankly, given the avalanche of negative news that all of us have endured, any form of positive message would be a welcome improvement.

Something that clearly illustrates the investing public’s perception that the financial markets are improving is the current situation concerning U.S. Treasury bonds. As I pointed out in my December 13, 2008 post, “What We’ve Got Here Is a Failure to Communicate,” investors that ran to the safety of Treasury bonds did so at the risk of a significant amount of capital loss over a short period of time.  

As 2008 came to a close, the 10-year Treasury bond was threatening to break below 2% annualized. Investors that were late in buying those bonds have now suffered through a dramatic decline in principal in the fourtrading days that have occurred so far in 2009. Four trading days since the beginning of the New Year, the 10-year Treasury is now yielding close to 2.5%. These investors have incurred a massive loss of over 4.5% in principal in a little less than one week.  So much for the safety of investing in Treasury bonds!! 

A featured article in Investor’s Business Daily this week pointed out that money market accounts that invest in U.S. Treasury bonds are now on the verge of offering negative returns. Since these money market accounts require some expense to manage the funds, there is not enough of an investment yield to pay those expenses. For the first time ever, these money market accounts are now facing the difficult task of either closing entirely or offering potentially negative yields to the public.  It seems that the public is finally recognizing that other forms of risk capital, like equity and bonds, now offer an alternative to the zero interest rates Treasury bonds are offering.

Another obvious sign of an impending recovery is the incredible publicity regarding the efforts by Congress to revive the economy. The ante keeps being upped almost every day. It’s important to recognize that the original $700 billion in TARP money has not even been completely expended. The $350 billion doled out to the banks has barely been in the system, and the remaining $350 billion of the TARP money has yet to be allocated. I think we will live to regret trying to push the remaining money into the economy if we don’t wait to see whether the $350 million that has been expended has been effective. 

I fully realize that I previously stated that it’s better to over-stimulate the economy rather than take the risk for it to not be stimulated enough. However, the question really becomes, “How much is enough?” With these two stimulus bills alone, we are talking about nearly $2 trillion in additional stimulus money. Additionally, the Federal Reserve has launched their program to buy mortgages, pushing down long-term home mortgage rates significantly below 5%. It would have been more desirable to wait and institute these programs gradually to determine the progress before funding the next program. I guess we will never know now since it is clear that a bipartisan Congress will approve a gigantic stimulus package sometime before February 15, 2009.  

Democrats in Congress originally touted an economic stimulus plan of approximately $100 to $300 billion. Over the last week, this money has grown exponentially to $700 billion to $1 trillion. Unlike the TARP funds, this money will not be invested in assets that will be returned back to the Treasury. Rather, these assets will be invested in tax cuts and infrastructure for building bridges and roads. In other words, once this money is spent it will be gone forever, which is concerning. There’s no question that the economy has stabilized over the last month. But my fear is that this incredible flood of money from Congress’s economic stimulus package will destabilize the economy in the coming years.  I fear that the economy will already be improved before this money is ever spent.  

On another matter, the press – which is quickly becoming my #1 nemesis – is at it again. The Atlanta Journal-Constitution recently stated that the U.S. deficit would exceed $1.2 trillion in 2009. While the deficit unquestionably has the potential of getting that large, the AJC didn’t bother providing the specific details. In fact, after reviewing the specific bill, it’s fairly clear that some of these expenditures will only happen one time and will not be ongoing expenditures.  

It’s currently estimated that the TARP will generate a loss of only $184 billion in the 2009 budget as compared to the $700 billion deficit being proclaimed by the press. During this budget year, the Federal government will invest $218 billion in Fannie Mae and Freddie Mac. This is a one-time investment that, in fact, should generate net positive returns to the Treasury in the future. In addition, the Federal government has invested $24 billion in the FDIC to stabilize that fund for potential bank failures and will not be recurring in future years.  

Accordingly, in the Federal 2009 budget, $426 billion is expected to be expended on one-time only items. Unfortunately, the media doesn’t seem to take those facts into consideration when publicizing the potential deficit.  For the press to say that this potential deficit is a higher percentage of GDP than the deficit for 1980 – which is something I have been reading lately – is completely false.

The economy doesn’t need to fully recover in order for stock prices to start climbing upward. What we really need is for the economy to stop going down, not turn up. If all of us suddenly realized that the economy had bottomed, the stock market would begin to turn-around practically overnight.  

Not many people realize that the financial markets actually traded positively for the month of December in 2008. I wouldn’t be surprised if you hadn’t heard this positive news. With the avalanche of bad news being provided by the media, it is really hard to uncover even the smallest amount of positive news. However, the Dow Industrial was up 0.6% for December, the NASDAQ was up 1.1% and the S&P 500 was up 2.8%. These returns for December were quite excellent, and it was a good way to end an otherwise disastrous year.

One reason why I feel that movement is starting to happen is because of the improvement we have seen in stock prices since the market bottomed on November 20, 2008. Since that day through today, the Dow Industrial Average is up 15%, the S&P 500 is up 21%, and the NASDAQ is up 23% (notincluding dividends). The stock market is clearly improving, although it’s hard to see that with all the negative news we’re being provided.

I want to reiterate that the volatility we suffered in 2008 was completely unusual. I recognize that investors felt devastation every time they reviewed their dwindling portfolios, and I can tell you first-hand that money managers were feeling the destruction every minute, 24-7. It is incredibly difficult to explain all the wild moves and volatility when the economy doesn’t even support those drastic moves.  In any event, I think it’s safe to say that we’ll never in our lifetimes see the type of volatility that occurred in the 4th quarter of 2008.

In the history of stock market investing, there have only been 37 days where the S&P moved over 5% in a single day. Of those 37 days, 18 of them occurred in 2008. For perspective, there were two days of 5%-plus moves in 1950, one in the 1960’s, one in the 1970’s, seven days in the 1980’s, fourdays in the 1990’s, and four days from the period from 2001 through 2007. In 2008, when the S&P moved 5% or more on 18 days, seven of those days were positive and 11 were negative.  

In essence, we had more 5% moves in the S&P 500 during 2008 than we have had in the entire history of investing prior to 2008. In terms of volatility alone, the 4th quarter of 2008 was like suffering through 57 years worth of volatility.  I don’t believe that we’ll ever have to suffer through this level of volatility again – it was clearly a year for the ages!

It’s also interesting to see the analyst projections for the stock market for 2009. The general consensus of market analysts is that the overall improvement will be 10% for 2009. However, I regularly see potential gains in the stock market in the 30% range. I suppose no one really knows what is getting ready to happen insofar as stock market performance. However, with the incredible flood of money that the United States and the rest of the world are forcing the economy to accept, business will improve this year! The stock market will foresee that improvement in business and will react accordingly.  

In closing, I’ve said before that it’s never a bad time to make your IRA contributions. However, right now couldn’t be a better time – the opportunity to make money for your retirement is staggering. Since the New Year has begun, you can now make your contribution for 2009 while the market is still low.  

Additionally, if you haven’t already made your contribution for 2008, you can make your contribution for that year at the same time. If you are less than 50-years old, the maximum amount you can contribute per year is $5,000 (a total of $10,000 if you’re contributing for both years). For those of you who are 50-years old or older, the maximum contribution amount per year is $6,000 (a total of $12,000 if you’re contributing for both years).

The benefits to contributing to your IRA are tremendous, especially when the markets are at such low levels and they are expected to significantly increase. Please feel free to call our office at 404-892-7967 if you have questions about contributing to your IRA.

As I’ve explained above, I expect significantly better stock market performance in 2009 than we have enjoyed over the last four to five years, and I think it’s already starting to happen.

Best regards,
Joe Rollins