Tuesday, October 10, 2017

Is this a great country or what?

From the Desk of Joe Rollins

We have just ended what is historically the worst month of the year for stock market performance. Not surprisingly, given the very strong markets that we have had for all of 2017, the S&P 500 was up a sterling 2.1% for the month of September - so much for this being the worst month of the year. In fact, it was the best September since 2013. The economy continues to grow, earnings continue to increase and interest rates continue to stay low. The components for future positive stock market performance are all in place.

I would like to talk to you about various aspects of the stock market performance and why I do not see a large downward shift coming anytime soon. I will illustrate what happens when the “Wealth Effect” starts to take over the higher end of the economy. We are now seeing this in the U.S. economy, and more importantly around the world, which should lift stock markets around the world higher. However, before I begin all of that terribly interesting information, I need to cover the performance of the markets through the first nine months of 2017.

Ava horseback riding in the mountains and building sandcastles at the beach - all in the same month!



As mentioned, the Standard and Poor’s index of 500 stocks was up 2.1% for the month of September and is up a very respectable 14.2% for the year 2017. For the one-year period ended September 30, 2017, that index is up double digits at 18.6%. The Dow Jones industrial average was up 2.2% for September, up 15.5% for 2017 and up 25.4% for the one-year period ended September 30th. The NASDAQ Composite index was up 1.1% for the month of September, 21.7% for 2017 and up 23.7% for the one-year period ended September 30th. For all of those forecasters that continue to forecast gloom and doom for the equity markets, they must be truly amazed to see close to 20% performance for all of the major market indexes for the one-year period. As the above numbers indicate, we have been correct in our insistence that one be fully invested during this highly profitable time.

I always like to illustrate what the bond index reflects given our projections that you are not likely to make money in a bond index portfolio. For the month of September the aggregate bond index was down 0.5%, for the year 2017 it was up 2.9%, and for the one-year period it was down 0.2%. Therefore, if you have been invested in bonds over the last 12 months, you have actually had a negative rate of return as compared to an almost 20% gain on any of the other major market equity indexes. Not much explanation is needed to see why we forecasted negative returns in bonds and positive returns in stocks.

Last month I wrote about how much happier my life has been since I quit watching the news. Don’t get me wrong – I keep up with current events, I just do not watch the editorials that try to explain them. The one thing that I do is make a concerted effort to look at what is going on around me rather than what people are telling me. I am convinced that a lot of commentators believe that they can influence the thinking of the population by slanting the news in a fashion that meets their agenda. I decided I would rather make those decisions on my own, and I feel much better about the world since doing so.

You have to admit though, when disaster strikes, this country steps up. Over the last couple months, we have had hurricanes in Texas, Florida and Puerto Rico along with mass murders and other shocking news developments. However, this country rallies at the time of disaster, and the response is overwhelming. Who would have ever believed that a defensive end for the Houston Texans would raise $20 million for hurricane relief by simply asking for it? When the federal government gets into disaster mode, the relief is overwhelming. They move in with housing, clothing, support and take care of thousands. Not to say there is not human suffering and, of course, financial loss, but the attempts to alleviate the basic discomforts of the disaster were in full exhibit over the last two months. What other country can you think of that has done so much to help the average person? We continue to help Puerto Rico due to the tremendous issues its government and infrastructure currently face.

While the financial news has been quite positive, the doomsayers still want to argue that the price earnings ratio of the markets continues to be at an unsustainable level. However, perhaps they missed that earnings have been so strong that the price of the S&P 500 has actually fallen lately. How is it possible that the price earnings ratio could fall when stock prices have increased almost every month in 2017? The simple explanation is that corporate earnings have gone up higher than the index has. As a basic example, the S&P 500 price index has risen 15.4% over the last one-year period ended in June, however the earnings during that period grew at an even faster rate of 18.1%. Therefore, if the index grew 15% and earnings grew 18%, based on simple arithmetic, the price earnings ratio would fall rather than go up.

Every day, we are confronted by forecasters who say the stock market cannot sustain a continued increase. I would agree with them to the extent to say that if earnings cannot keep up with the increase, then it is true that the markets cannot sustain this valuation. However, to this point, earnings have not only kept up with the index, they have exceeded it! I am always amused by those who like to report statistics to support their forecast that the earnings are going to go into free fall. They often point out that sales to earnings are declining. They also point out that book value is a multiple of valuation and our revenue per employees has fallen and that the dividend yield per stock is falling, rather than going up.

If you have read our posts over the years, I hope that you have learned a very important point. Stock valuation is very much like real estate. As it is said in real estate, the three most important aspects are location, location, location. In stock market performance, the three most important components of valuing a stock are earnings, earnings, earnings. Yes, in both sectors interest rates are important and the economy is important, however, the MOST important aspect of valuation is earnings, and earnings continue to move up nicely at the current time.

Yes, it is important to look at prior earnings, but the most important component of stock market valuation is future earnings. Just like the last 12 months ended June 30th saw an 18% increase in earnings for the S&P 500, forecasters now project an increase in earnings of an additional 18% over the next year. As long as earnings are moving up, it is highly unlikely that any one event (other than a geopolitical disaster) could move the markets down.

We are also seeing an all too obvious economy that continues to strengthen. Unemployment is now at a multi-year low at 4.2%. Literally, anyone who wants to work can get a job – it is just a matter of finding a job that suits his or her skill set. There is no shortage of jobs as “help needed” ads continue to pop up for unfilled positions. Now that we are operating at essentially full employment, the flow down of wealth is occurring at all levels. Each person that has a job supports other people in his or her household as well as their community with their income and spending. The compounded effect is that you are seeing all aspects of the economy grow in some respect. The strengthening of employment is by far the most important component to keeping the economy strong. At the current time, we are in a “Goldilocks environment” as it relates to employment since the unemployment rate is extremely low but not so low as to create a strain on the labor markets.

In addition to the good news on the economy, the tax cut policy is going to bring further economic growth soon. I even have to quote the famous Warren Buffett, who is clearly a democrat when it comes to economic terms, as he admits, “I think they can get it done (commenting on Congress). It is not a tax reform act, it is a tax cut act. Any politician that cannot pass a tax cut is probably in the wrong line of business.” I believe he is exactly right on this subject. How could any congressman not vote for a tax cut with the general election coming up next year?

The natural outrage of the progressive wing of Congress was that the tax cut would benefit the rich. First off, the rules are very basic – 50% of the population pays no income taxes whatsoever. You cannot cut income taxes on people who pay no income taxes. If you are to have a tax cut, it must (by definition) cut the taxes of the people that actually pay taxes – the higher paid 50%. The other explanation was almost laughable. The progressive wing of Congress expressed outrage that the tax cut would explode the deficit. Lest we forget, this is the same progressive wing of government that over the last eight years has accumulated deficits greater than each and every president in this country up until the last. So, if you need experts on deficit producing economics, the current progressive wing are your experts.

But I also see an opportunity for enlightening that is going to change America going forward. Even the most liberal of commentators realize that what the progressive wing of the party has been doing is a mistake. When it comes to progressive agendas, Bill Maher may be one of the most progressive. Recently, it was a shock to hear him say, “We need to get some Democrats elected, and that is hard when the movement to childproof the world has made the Republicans a party of freedom and the Democrats a party of poopers.” I think it is fairly clear what he is saying. You cannot overregulate Americans, as U.S. citizens will not tolerate it. All of us were wringing our hands about the Obamacare disaster, but the reality was a lot simpler. At its maximum, Obamacare only covered 13 million Americans out of a total of 330 million people in the U.S. Therefore, the coverage of Obamacare was 4% of the population. However, the rules and regulations that controlled Obamacare affected 100% of the policyholders of medical insurance. This type of regulation is not only nonproductive, but also a waste of economic resources. Finally, we have an administration today that is cutting needless regulations which will clearly benefit the economy going forward. Good news for the economy!

Also, for the first time in many years, I see the “wealth effect” taking place. The wealth effect is when the consumer feels confident enough about their job that they will use their gains in wealth to buy consumer goods. Every day you see investors taking money out of the markets to buy new houses, new cars, new boats and other assets. As the markets move higher and the confidence of the average investor is secure, there is a slippage in investing and a tilt toward consuming. I do not need to illustrate to you how useful this wealth effect will be in making the market higher. When profits from investing slip out into the economy, it puts more people to work, creates higher tax dollars for the government, and it makes the economy better. With gains now up over 20% for the last 12 months, the wealth effect will very much be a positive going forward over the next year. The evidence is as overwhelming as it is remarkable that more people do not see it. If you will notice, restaurants are full on Friday nights, construction cranes are everywhere and consumers are buying all types of goods at record levels. Those who do not see the positive economics of the current economy clearly have blinders on, but it is not just in the United States. Growth is occurring in Europe, Asia and around the world.

Recently, I read an interesting statistic that illustrated this point. Basically, it was a boring article on corporations’ dividends but it said that dividends would grow this year from the S&P 500 by 7.7%. That was interesting considering they grew the prior year at 4.8%, and therefore have grown 10% over the last two years. But the number that struck me was that the actual number of dividends paid by the S&P 500 companies was $436 billion in actual dividends. That is up from last year’s $404 billion. As most of you know, dividends are used by many investors as their income stream. If their income stream grew at 7.7% this year, and pumped $436 billion into the economy, the wealth effect will only further increase going forward. Just for reference, the GDP of Puerto Rico was $101 billion in 2012 – 25% of the dividends paid in the U.S.

In summary, things are great in the U.S. at the current time. There is no question that there are terrible events occurring around us, but the good is definitely out there. Those who think the economy is faltering clearly do not see what is going on around them. Until this changes or a geopolitical event that is unexpected knocks it down, I see nothing but further gains over the next 18 months. Yes, they may be muted to the prior gains but up is always better than down.

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

Best Regards,
Joe Rollins

Wednesday, October 4, 2017

Who Will Be Your Voice?

Although we don’t like to think about it, death is inevitable. And while you may already know what you want in terms of end-of-life treatment, you may be in no position at the time to express those wishes. Even something as unpredictable as a car accident or a routine surgery gone awry may leave you without the ability to voice your consent or disapproval.


By completing an Advance Directive for Health Care you are able to assign someone you trust to make health care decisions for you, as well as articulate treatment preferences in the event that “you have a terminal condition or if you are in a state of permanent unconsciousness”, if you so choose. While the conversation may be unsettling for some, it is necessary that you discuss these wishes with your loved one(s) to not only ensure that your intentions are known, but to take some of the burden off them should the need arise. Imagine your loved one(s) having to make the decision whether to withhold water and food or life support without ever knowing your thoughts on the subject. These decisions could be just as devastating to them as they could be to you. Do not force them to make that decision - tell them while you can.

People often postpone handling important personal affairs due to the time-consuming and oftentimes cost prohibitive process that is required. This is not the case with a Health Care Directive – the only requirement for validity is that the document be signed by two witnesses, with neither being related to you, entitled to any portion of your estate, an employee of your residential facility if applicable, or named as your health care agent. No notary is required.

The following link https://aging.georgia.gov/services/get-advance-directives will enable you to download Georgia’s Health Care Directive, or we would be more than happy to mail you one at no expense to you. Upon completion, if you wish, you may send us a copy of your directive to retain in your file. While we are by no means providing any legal advice and it is always recommended you consult with a legal professional in order to fully understand your decisions, this document alone could potentially save you and your loved one(s) a lot of anguish down life’s unpredictable, winding road.

Best regards,
Rollins Financial, Inc.

Wednesday, September 6, 2017

I am much happier now that I do not watch the nightly news!

From the Desk of Joe Rollins

I have always been somewhat of a news junkie, going back to the late 1950’s when Huntley Brinkley had a 15-minute national news report on NBC. I even remember that day in 1963 when they expanded to a 30-minute show and wondering how they would ever fill up all 30 minutes with news. Compare that to today, where we have multiple 24-hour news channels and national news programs competing with headlines for entertainment value rather than reporting the news. I think the news is one of the reasons for the bad attitudes in the U.S, and, of course, that affects attitudes towards investing.

In college, I would try to find any television that was airing the news so that I could keep up with the Vietnam War and other significant events. But lately, I have completely given up on the news and will later explain why.

Before we continue this topic, I need to report on the month of August 2017. Going into August, we’re always apprehensive in regards to the performance of the broader equity markets. It is very important to understand that August is historically the second worst month of them all. It is second worst only to the month of September, which we are now entering. Any time that you have essentially a breakeven month as we did in August, you have to welcome the news. In fact, August was very much a good month for the growth sector of the equity markets, but a mixed market for the other indexes. Because of the poor performance of the oil sector and the oil stocks, most value funds were down significantly. Once again, small-cap stocks were a disappointment and down a couple percentage points during August as well. The real progress in the market during August was in growth funds and international funds. Fortunately, for us, both of these are our largest asset allocations at the current time.

To say that the financial markets have been on a positive run would be quite the understatement. For the month of August, the Standard and Poor’s Index of 500 stocks was up 0.3%. For the year 2017, it was up 11.9% and for the one-year period ended August 31, 2017, it was up 16.2%. The Dow Jones Industrial Average was up 0.6% for the month, up 13% for 2017 and up 22.3% for the one-year period ended August 31, 2017. As is usually the case, the NASDAQ Composite was up an excellent 1.4% in August, is currently up 20.3% for 2017 and up 24.7% for the one-year period then ended. As mentioned above, the small-cap stocks were down 1.3% for the month of August, up 4.4% for 2017 and up 14.9% for the one-year period ended August 31, 2017. Just to illustrate how poorly bonds have been performing compared to equities, the Barclays Aggregate Bond Index was up 0.8% for August, up 3.5% for the year 2017 and up only 0.3% for the one-year period then ended. As I have repeatedly pointed out, it is very difficult for bonds to make much money when we are enjoying all-time low interest rates with the direction of interest rates clearly up and not down. Regardless of what you read, it is just not an appropriate time to be investing in bonds at the current time.

As I have previously mentioned, including the 2017 year, the S&P 500 will have been up 14 over the last 15 years, with 2008 being the only year it was down. However, you would be absolutely shocked at how many times a day I am reminded of what a disastrous year 2008 was. Yes, I totally understand your concern; however, the S&P 500 is up a cool 265% since it bottomed out on March 9, 2009. How many people do you know who sold out of the markets in 2008 and have yet to reinvest? Unfortunately, we see a few every month that have not reinvested and are still paralyzed by the fear of another downturn. Given that your opportunity for making money over the last 15 years is at a 93% win ratio, I always wonder why those people refuse to take advice and remain governed by their own basic fear of investing.

Wilcox Family Beach Trip:
Partner Eddie Wilcox, Jennifer, Harper and Lucy


As mentioned in the title, I think a lot of this distrust of the markets is fueled by the negative news itself. Admittedly, I am a news junkie but even I have recently given up watching the nightly news. Quite frankly, now that I reflect back on it, I neither miss it nor do I feel deprived of current news. The turning point in my feelings regarding the news was very basic. Recently, one of the high-placed Trump officials either resigned or was fired by the current president. When I got home and turned on the news, it seemed that the news outlets were almost foaming at the mouth to explain this event. Of a 60-minute show, 45 minutes was devoted to the realization that this one advisor would no longer be part of the current administration. My reaction to the entire news event was, “Who cares?” – tell me what the news is instead of telling me how to evaluate it. I now seek the news through other outlets, where it is truly news and not implicit (but not labeled) commentary.

One of the most respected polls on investing, the American Association of Individual Investors, reports on how individual investors perceive the markets. It is amazing that the bullish sentiment of investors has been below 50% for a record of 138 straight weeks and currently sits at a very low level of 28.1%. To put this into perspective, for two and a half years only ¼ of those individual investors felt bullish about the market. They have also seen the S&P rise almost 30% over that timeframe while not invested. I have recommended time and time again that you remain invested despite such negative information from the news and, fortunately, my advice has been correct.

When many clients come in, they talk about all of the negativity in the world and why the markets are due a pullback. However, when they drive home, they see evidence all around them which contradicts such negative feelings. As I have pointed out the last few years, one of the major components of a strong economy is getting people back to work. The more people we have working, the more money there is to support businesses, and therefore the stock market. In the most recent week, unemployment reported that businesses have expanded their monthly payrolls for nearly seven years. Think about that for just a second. Every month, over the last seven years, businesses have added more employees than the previous month. Oh, and by the way, that happens to be the longest streak ever recorded of businesses expanding their payroll. Do you really believe that business owners would be adding more employees if they really felt that their business was turning negative?

Once again, we just finished a record quarter for corporate earnings. Interest rates continue to border on all-time lows and in fact they moved lower last month. The economy is strong and getting stronger. Every business reports that they cannot find enough qualified people to fill the positions that they have available. Even my own firm advertised continuously for qualified employees for quite some time and in some cases we did not receive a single qualified applicant for quite some time. This is happening all over America and yet unbelievably some investors feel that we are falling into a recession for reasons even they can’t explain.

All you have to do is actually look around to know that a recession is not likely. As I look out my window in Buckhead, I see construction cranes in every direction. I run across traffic jams at every part of town and yet they continue to build condominiums and apartments everywhere you look in Atlanta. Not only is business strong in the U.S., it is getting stronger around the world. I recently reported on my trip to Europe, but we are now even seeing positive GDP in Japan, which has been in recession for 25 years.

Since the first of 2017, the U.S. dollar has fallen considerably against all foreign currencies. That is not the fault of the U.S. dollar, but rather the increasing strength in foreign currencies. Due to the falling dollar against those currencies, the international mutual funds have well out-performed the U.S. funds. The majority of equity markets around the world have grown in high double digits, exceeding the low double digit growth of the U.S.

The nightly news reports endless tragedies around the world and 100% political discourse in the U.S. However, once again, the news misstates what should be obvious to every investor. While the current administration is certainly making positive gains in business, virtually all we hear of are the negative things they have done. I wonder if you have ever seen the news report that the Trump administration has withdrawn or delayed 860 proposed regulations by executive order. They have also overturned or delayed implementation of the business- unfriendly Obamacare. This is extraordinarily good news for businesses and employees in America. However, you would be hard-pressed to find even one word of positive economic evidence by watching the nightly news.

I am asked almost daily to reflect on when the next downturn in the markets will occur. I am happy to report that every selloff for the last nine years has been a buying opportunity. I read regularly that the market needs to selloff so new investors will come in and invest. However, if the same investors have been on the sidelines in one of the greatest bull markets of all time, you have to wonder what could possibly bring them in at this late date. Last month I reported on the top 10 most important topics of economic news. If you missed it, please refer to it here. As we finish the month of August and go into the fall season, I can report that each and every one of those 10 sectors is very much positive at the current time. Once we get through the month of September, the period of October through May is historically the strongest time period for investing. Therefore, it is likely that before 2017 is over we will see additional gains to an already sterling investment year.

Perhaps I am avoiding the obvious question that is probably on your mind. What will ultimately bring down this historically good bull market? Believe me, it is not political discourse or world events. Although hurricane Harvey was tragic and caused much public suffering, as much as it hurts me to say, it was a positive for the economy. $150 billion in anticipated rehabilitation costs for Houston will have a huge economic affect which will be forthcoming in the next 18 months. Yes, short-term negative, but a huge long-term positive.

Several clients approached me last month regarding the potential for war with North Korea. It is now reported that North Korea has a one million man standing army, but do you know what their army suffers through on a daily basis? Malnourishment. Yes, they have a huge army but cannot feed them. Additionally, China has cut off their gas supply into North Korea and now no country will assist North Korea by purchasing their goods and services. But to answer their question, rearming the military and providing the financial support of a short-term world war would clearly be an economic stimulus against a backdrop of huge personal suffering, very similar to World War II.

So if none of these things would lead to the downturn of the market, what would? Recession. Recession is the only one true 100% indicator of a negative market. When recession comes, the market will go down. We are currently at full-employment, experiencing historically low interest rates, with earnings at all-time highs and a worldwide boom as an increase in GDP. How anyone under any circumstances could project a recession from this overwhelmingly positive news continues to baffle me. As I talk with investors every day and they express the negative opinion that the markets cannot go any higher because they are at all-time highs, I ask them what economic event leads them to this conclusion. Almost universally, their opinion is based upon the negative national news (fake or otherwise). However, I hope you do as I do – take a look around and evaluate the economy with what you see and never form an opinion based solely upon the nightly news.

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

Best Regards,
Joe Rollins

Thursday, August 31, 2017

Happy Labor Day!

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 4th. Please note that all major U.S. stock exchanges and banks will also be closed due to the Labor Day holiday.


If you require immediate assistance on Monday, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com. Our office will reopen for business on Tuesday, September 5th at 8:30 a.m.

Be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Monday, August 14, 2017

It Gets No Better Than This!

From the Desk of Joe Rollins

Apparently, everyone is too busy to sit and read everything in the news these days so the format seems to have shifted to a more condensed, simplified version. Never wanting to be the square peg in a round hole, I too will adjust the layout of this blog and give you my top 10 reasons to invest. The first half of 2017 has been a great investment period, and those sitting around in cash must be regretting their investment choices. Before I move on to a much more interesting subject, I need to cover the first half of 2017 investment results.

The month of July was an excellent month, just as all of 2017 has been. During the month of July, the Standard and Poor’s index of 500 stocks was up a cool 2.1%. For all of 2017, it is up 11.6% and for the one-year period ended July 31, 2017 it is up 16%. The Dow Jones Industrial Average was up 2.7% for the month of July, 12.3% for the year and 21.8% for the one-year period ended July 31, 2017. The NASDAQ Composite was the best performer of the major indexes up 3.4% during July, 18.7% for the year 2017 and 24.4% for the one-year period ended July 31, 2017. All three major indexes have been significantly higher for the year 2017 and even higher for the one-year period then ended. Just for purposes of comparison, the Barclays Aggregate Bond Index was up 0.5% for the month of July, up 2.6% for 2017 so far, but down 0.7% for the one-year period ended July 31, 2017. As you can see, all of the major stock indexes were up double digits for the one-year period ended in July, while the bond index was down for the one-year period then ended. As I have been pointing out in these posts over the last few years, bond investing is currently counter intuitively more dangerous than investing in the stock market.

Look how fast they grow!

Ava (age 2)

Ava (age 6) and CiCi

Needless to say, the profitability of Wall Street has been staggering over the last few years. However, I did run across a quote that I found quite amusing. It seems that the cash held by the largest corporations in America today exceeds $2.2 trillion. One company, Apple, owns a staggering $261.5 billion in cash. Just to put that amount into perspective – that is more than the market value of 490 companies in the large-cap S&P 500. Let me try and explain it in layman’s terms so you can appreciate these amounts. If you spend $1 million of Apple’s money each and every day of your life, it would take you 716 years to go through this pile of cash. Oh, and by the way, that is assuming that your cash is earning zero going forward.

And now, my ten most important reasons why you should be invested are as follows:

1. Corporate earnings have been nothing short of spectacular. It appears that when this quarter is finished earnings will be up double digits over a similar period prior-year. This is coupled with a first quarter gain that also saw a double-digit increase. You very rarely see corporate earnings growing this rapidly with such a large base of corporations reporting. However, if there is one important thing that is controlling the upward projecting of the stock market, it is that corporate earnings continue to outperform.

2. Inflation, year over year, is virtually flat or gaining only a small amount. While this may not affect you individually, it is extraordinarily important from a monetary standpoint. With no inflation and a very strong economy, the Federal Reserve has no reason to increase interest rates any time soon. If we were in a hyperinflation mode, you would see the Federal Reserve increase interest rates to slow down the growth of the economy. We are clearly in a Goldilocks environment when it comes to inflation. Not too strong, not too weak – just right. At the current time, with inflation barely nudging up, I rather suspect that we will see only one and maybe no interest rate increases for the rest of 2017 and remain very low.

3. Compared to last year, the dollar has been falling in value for most of the year. When the dollar is falling, that means that U.S. corporations compete more favorably overseas, and therefore they have the opportunity to make more profits. It is believed now that of the Standard and Poor’s 500 Index of stocks, almost 50% of their sales are outside of the United States. With the dollar down, these companies can now compete with local manufacturers and is one of the principal reasons why corporate profits are up so significantly in 2017.

4. Congress is totally dysfunctional and that is a good thing! It has been proven by numerous surveys that the stock market does best when Congress just leaves it alone. The fact that Congress cannot get anything approved is very much a positive thing for the stock market. Some of the best years ever enjoyed by stock investing were during the President Clinton years. With a Democratic White House and a Republican Congress nothing got accomplished during that time. Now we have a similar Congress that cannot even approve a day off, and for those of us who do the investing, that is as good as it gets.

5. During 2016, the U.S. economy was strengthening as the year progressed, but the rest of the world was lagging far behind. And now, in 2017, there is a big change with Europe’s economy strengthening. For the first time since the 2008 financial crisis, Europe is growing again. As I pointed out in my last blog, I personally witnessed the strong economy in Europe with money being thrown around by consumers everywhere and for the first time in a long time, growth prospects in Europe is outstanding. Also, we are seeing a rebound in Japan and virtually all of Asia. We all know China has been productive for a long time, but now we are seeing both India and Southeast Asia growing by leaps and bounds. While the U.S. market is almost fully valued, there are many gains to be realized in Europe and Asia where stocks are cheaper, the economy is growing and the prospects for profits have rarely been higher. We invest where profits are found.

6. Interest rates continue to be extraordinarily low. We are still talking about 30-year mortgages on homes at less than 4%. As pointed out in many of these blogs that I write, interest rates have never been this low for so long. I do not anticipate that we will see a major downturn in the housing market until interest rates turn around and go in the other direction. It looks like that will be years away instead of months. Therefore, my projection is for all of 2017 we will probably only see one quarter point increase and probably only two rate increases for 2018. With such low interest rates, cash is paying virtually zero to income investors. Therefore, given the very low rate of interest earned by cash and bonds, seemingly to me, stocks are the only place to invest.

7. The economy is extraordinarily strong and is only getting stronger as we move through this year. The unemployment report was recently announced at 4.3% - this is the best rate in over a decade. Every time one person gets a job, they support many people around them. Not only their families, but also the corner drug store and other places where they spend their money. Every segment of the economy now reports that it is virtually impossible to find qualified workers and that is a really good thing for stock market investing. While the consumer is 70% of the U.S. economy, the more money you put into the pockets of consumers, the more likely they will spend that money. Frankly, it just does not get any better than this financially, to have a growing economy with low inflation, low interest rates and earnings that are going up.

8. We have a current administration that is thankfully killing government regulations with both hands. For years, the economy has been bootstrapped by a congress that defers regulations without thinking of the ramifications they will have on businesses. This president is eliminating regulations and freeing business to operate as it should. There is no question that the more regulations that are dropped off the books, the more likely corporate profits will continue to grow. This is a win-win for all Americans. Maybe I should tweet it!

9. Regardless of what you hear on television, read in the newspaper, or what you actually believe, tax rates are going down. This is not a policy that is wanted only by Republicans, but by all members of Congress. Everyone wants to cut tax rates for both corporations and individuals. It most assuredly is going to happen this year in 2017. The economic effects of these tax cuts will be enormous. Corporate profits will increase dramatically and the consumer will realize improved cash flow, giving them more buying power that is likely to be turned into commerce. I can hardly put into words how important these tax decreases will become. The stock market has every reason to stay up at the current time, but throw all the good news listed above on top of that and an income tax decrease and you will see enormous profit growth.

10. It defies imagination that more people are not talking about the repatriation of foreign dollars to the U.S. as it could single handedly change the American economy. It is also hard to believe that for the last decade Congress has completely ignored this potential source of revenue. If it does happen, which I believe it will, Congress will pass a repatriation tax of 10% rather than the current 35%. It is believed by many that there is at least $1 trillion to $3 trillion in overseas accounts owned by American companies. If they get the opportunity to repatriate that money back to the United States at a tax rate of 10%, there will be enormous good created by these funds. It is hard to believe how little congress has understood about this situation in prior years. The Democrats wouldn’t approve such a repatriation tax because according to them, American companies would only use that money to pay corporate bonuses and/or dividends to their shareholders. How na├»ve are they to not realize that both of those items create substantial income tax to the U.S. Treasury? Take it one step further and assume that 100% of the repatriated tax would go directly to infrastructure building in America. Just envision how many people would be put to work at really good, high paying jobs, if say $2 trillion came back at 10% and we had $200 billion of roads and bridges to build. If you then couple those jobs with the private sector providing much of the capital over the next decade you could have infrastructure spending of close to $1.5 trillion. Meaningful money for the economy and it is coming.

There you have it, my ten reasons why you need to be invested. Frankly, I could have written more. Nothing earth shattering and essentially the same facts that I have been pointing out over the last two years. With cash earning virtually zero and bonds appearing to be in a lost position, your best choice for investing is the stock market. I do not anticipate any change in that forecast for the next 12 months or so.

Once again, we invite you to visit with us. Due to the slow summer months, we have plenty of time to sit down with you and discuss the stock market, investing or any other subject you would like. Please call our offices and set up a convenient time.

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

Best Regards,
Joe Rollins

Tuesday, July 11, 2017

Fake News - Not Practiced Here.

From the Desk of Joe Rollins

I am a great admirer of Peter Lynch, the famous mutual fund investor. He has written several books on investing in the stock market, but the one that made the most impression on me pointed out that often times investment ideas, concepts, and/or economic realities seen every day are overlooked or ignored. I have found that to be true over and over again. So many people are influenced by the news (or so-called “fake news”) and pay no attention to the contradictory evidence around them. The economic aspects of the world are played out on the streets and within shops and construction companies, and should not be ignored.

I recently had the pleasure of visiting London, Paris and Edinburgh and have some thoughts I would like to share with you. So much can be learned about the world’s economic status by visiting some of the greatest cities in the world. I will share those reflections with you as well as my observations regarding economic reality in those countries.

I also want to bring you up to date on the unbelievably good economic reality we are experiencing here in the United States. All of the economic tea leaves are pointing in a positive direction. Of course, there are significant geopolitical events, but you cannot invest around “what might be”. You must invest based upon what you are looking at currently. It is important that you can differentiate between the fake news as reported on many internet services and national broadcasts, and the real economic evidence that is all around us.

First, I need to report on the month of June, which was basically a flat month. However, the overall six-month period ended June 30, 2017 was quite impressive. We have enjoyed a massive move up in the financial markets since the election of the new President, and all of the major market indexes were very favorable over this time period.

The Standard and Poor’s Index of 500 stocks was up 0.6% for the month of June and has enjoyed a 9.3% year-to-date performance and a one-year performance of 17.9%. Interestingly, the index was the lowest performing index over the major ones for the one-year period then ended. The Dow Jones industrial average was up 1.7% for the month of June and is up 9.3% for the year-to-date in 2017. It has also enjoyed a quite handsome 22.1% increase for the one-year period ended June 30th. The NASDAQ Composite was actually down for the month of June 0.9% but it is the best performing index up 14.7% year-to-date in 2017 and up 28.3% for the one-year period then ended. The top performer in the month of June was the small-cap Russell 2000 which was up 3.5% for the month of June, but has had a disappointing year in 2017 up only 5% for the year but up a very handsome 24.6% for the one-year period ended June 30th. The Barclays aggregate bond index was negative for the month of June, up 2.2% for the year-to-date, but negative for the one-year period ended June 30th, a 0.6% loss.

Paris

Edinburgh

London

Economic news has turned out to be very good in 2017. On Friday, they announced the June employment numbers and they were quite extraordinary. Nonfarm payroll had expanded by 222,000 in the month of June and the jobless rate was fixed at 4.4%. As we have mentioned often times in these postings, unemployment of 5% or lower would by all standards define full employment. There is also much going on in the interest rate cycle that is affecting fixed income investors. The Federal Reserve has recently expressed their concern about a stock market that continues to go higher and has reflected that they would like to increase interest rates dramatically as the year goes on. Of course, they counter that with the opinion that if inflation does not increase and the job market stays reasonable that interest rate increases could be delayed longer than this year. It is very clear to me that the Federal Reserve has a high desire to increase interest rates and is likely to do so by the end of this year as well as a couple of times during 2018. However, even at this level, interest rates are still extraordinarily low and it is unlikely that there would be any major effect on the equity markets until interest rates were well above 3%.

However, there is great displacement occurring in the credit markets (bond investing). As an example, this month the benchmark German 10-year bond yielded more than double from its recent lows. It is now an 18-month high at 0.58% as of this past Friday. Please note that although the German 10-year bond has doubled in recent weeks, it still has a yield of only one half of 1%. If those types of yields do not encourage stock market investing, nothing else will. Likewise, in the United States, yields have jumped up dramatically on our 10-year treasury bond, and, as of last Friday, closed at 2.39%. What is important to understand regarding this 10-year treasury is that almost exactly one year ago the treasury was yielding a lackluster 1.37% and in that one-year period has moved up to 2.39%. Despite how much you know about the credit market and bonds in general, interest rates are usually a good indicator of future economic activity. As interest rates increase, a stronger economy is being predicted, so the Federal Reserve tries to slow it down to a more reasonable level. This upward movement of interest rates also tells you that a recession is unlikely.

There has been much in the news lately regarding fake news. Every morning when I get up and read the headlines on Yahoo, I am just blown away. Did you realize that when President Trump has people to the White House, he gets two scoops of ice cream and everyone else receives just one? Really?! Now, that is the type of news that can really move the needle economically. I read almost daily on this website that the number of people in America that would like the President impeached is greater than his approval rating. I am not exactly sure where that survey was compiled, but I am willing to bet that its authenticity is in question. But again, maybe it is these headlines that are so confusing to the investing world which creates the uneasiness that investors feel.

It is much more important to look around you and see the economic reality of what is actually going on as compared to what is reflected. There is nowhere in Atlanta that traffic does not dictate your every movement. Everywhere you look, construction is ongoing, even in downtown Atlanta. This would not be the case if economic activity was down.

I just got back from London and Paris and both of those cities are covered up by tourism. Around Westminster, you can hardly walk the streets due to the number of tourists visiting. In Paris, the line to tour the Eiffel Tower winds around the block. Everywhere you look, tourists control ever restaurant, hotel, museum, and tourist attraction. Despite what you might suspect, the fear of terrorism is not deterring visitors from all over and the tourism industry is continuing to boom. It does not take a rocket scientist to realize that tourism would not be at all time levels if economies around the world were not in strong economic conditions.

President Trump recently criticized Germany’s Chancellor, Angela Merkel, by exclaiming that Germany was not a good trade partner with the United States. Of course, as always, the press widely criticized our current President with the exclamation that Germany was a strong ally of America and any criticism of Angela Merkel was sexist, uninformed or just downright nasty. I am here to tell you that I saw with my own eyes that President Trump was correct. If you drive around Atlanta, you do not have any problem finding an overwhelming supply of international cars. Mercedes, BMW, Volkswagen, and of course the Japanese automobile makers probably sell 50% of all cars actually sold in the U.S. However, in London and Paris, you see zero American cars. There are no Fords, Chevrolets, Buicks, or any type of American cars in London and Paris. Virtually all of the cars are either European made or are from Japanese manufacturers. That is exactly the point that the President was making, which was missed by the general press.

The point is that it is perfectly okay to import cars into the United States, but you must let us export them to Europe. If you are going to restrict our cars coming into your country then we must restrict your cars from coming into our country. It is such a basic concept that I am amazed anyone would have an issue with it. We are not talking about open trade – everyone votes for open trade. What we are talking about is equal trade. If you charge our goods a tariff, we will charge your goods a tariff – and frankly, it is already happening.

Around the world, companies are looking to come to the United States to manufacture since there will be obstacles put in place for countries that do not trade fairly. The fallout of this will clearly be a benefit to American employees as you will see more manufacturing jobs in the United States. The President recently announced plans for exporting liquefied natural gas to Poland. It is hard to fathom that anyone could criticize us exporting natural gas, creating fabulous new jobs in America and providing Europe with a commodity they desperately need at a competitive price. These types of subtle changes in the way business is transacted will greatly enhance America’s economy in the upcoming years.

As for the stock market, it would not surprise me to see flat summer months. We have had an extraordinarily good run in the last six months but a flat summer would certainly not be surprising. However, I feel very strongly that the market will end up higher at the end of the year than it is today. Almost every day I am approached by investors who want to know about the ultimate pullback. First off, there is no economic news anywhere to support a pullback. Yes, there are geopolitical concerns that none of us can forecast and certainly none of us can invest for going forward. However, if the economy is an indicator of the stock market, there is clearly no downdraft in place.

There are so many investors that have missed this run up in stocks who are dying to get reinvested. When you see a 20% return over the last year and you have been sitting in cash for that one-year period, the last thing you want to do is admit that you have missed a major financial opportunity. If the market would pull back 3-5%, it might actually give these people back into the markets and they would jump in and be fully invested. I am sure it sounds strange to hear me say a correction is a good thing, but at the end of the day maybe a small pullback could lead to a larger move forward in the coming months.

As we close the second quarter of 2017, it appears that the earnings are projected to be up roughly 8% on the S&P 500 Index companies. That is after a 15.3% increase year-over-year in the first quarter’s earnings. It was recently announced that the GDP growth for the first quarter was 1.7%. It is difficult to perform an analysis that would not make you believe that the GDP for the second quarter would be closer to 2.5%. And we are not the only ones enjoying prosperity. For the first time in a decade, it appears that Europe is going to have a positive solid GDP growth. Japan is also higher and Asia, as a whole, is on fire. The one thing that will always baffle me about investors is that they focus on relatively minor news to form economic forecasts when it is very simple to focus on the following three questions: Are interest rates still low? Are earnings still good? Is the economy solid? As pointed out above, all three of these major market forecasters are very much positive at the current time.

I could write a whole blog regarding dangers to the U.S. economy. However, none of those dangers are things that we can forecast today. What we can forecast is what the economic cycle is at the current time. Might there be recessions two to three years out? Of course, there might be, but that would give us a long time to react with your investments between now and then. For the current time, the market appears to be stable and moving higher. I always wonder how people who have sat in cash for the last couple of years justify that position. I guess that is the old thought that you can justify your actions with some sort of negative assertion. However, unequivocally they have been mistaken. As always, we invite you to visit with us so we can make sure you are on the right path to meet all of your goals.

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

Best Regards,
Joe Rollins