Tuesday, May 16, 2017

Stocks are expensive under normal times - these are not normal times.

From the Desk of Joe Rollins

I make it a point to watch the news every evening at 6:00 p.m., even though it is quite difficult to wrestle the T.V. remote away from my beloved daughter and her cartoons. Often times after watching the news I scratch my head to understand exactly what they are discussing and why. Clearly, these viewers of the nightly news are not seeing the positive economic benefits that can be found everywhere. I also read the headlines on Yahoo on a daily basis and think, “What cave do these writers live in?” The economic news is so overwhelmingly positive at the current time that it should be difficult for any writer not to see the clear and convincing positive economic tea leaves.

I will deal with some of the issues that the opening paragraph contemplates later, but first let me report the extraordinarily good news of the stock market. For the month of April, the Standard and Poor’s Index of 500 Stocks was up a nice 1%. Year-to-date, it is up 7.2% and for the one-year ended, it is up 17.9%. And by the way, that is the worst performing index of the major U.S. indexes. The NASDAQ Composite was up 2.9% in April, 12.7% year-to-date and 28.2% for the one-year period then ended. The Dow Jones Industrial Average was up 1.5% in April, 6.7% year-to-date and up 20.9% for the one-year period ended April 30, 2017. Just to give you a basis of comparison, the Barclays Aggregate Bond Index was up 0.7% for April, up 1.5% for 2017 so far and has a one-year total performance of 0.5%. Notice I did not say 5%, I said one half of 1%, or 0.5%, for the one-year period then ended. How anyone could make a positive recommendation for bonds in this environment and keep a straight face is quite beyond my ability of comprehension.

From a personal standpoint, I have been very busy this year with tax season and other matters. The first weekend in May was quite an extraordinary time. My son, Joshua, graduated from Auburn University with honors from their business school – maybe one day he will work here. Simultaneously, my daughter, Ava, graduated from kindergarten. Yes, I know there is a big difference between age 22 and age 5. However, both were significant and certainly events to be celebrated. Josh is now moving on to graduate school at Auburn while Ava ventures into the excitement of her first year in real school. It is an exciting time for everyone. Congratulations to both for a job well done!

Josh and Ava

Dakota, Ava, Josh and Joe

Danielle, Robby, Joe and Eddie
Partners at Rollins

I would like to cover some of the positive economic events and go over some items that you may have missed due to all of the negative headlines that confront us every day. As the headline of this posting indicates, no one could argue that stocks are cheap today by historic standards. Prices today are roughly 21 times earnings, which is not terrible if you compare that with the average of 19.2 over the last 25 years. Certainly, not outrageously expensive, but certainly not cheap. However, those numbers do not explain why stocks continue to climb. With the low interest rates that we enjoy today, even Warren Buffet comments, “Measured against interest rates, stocks are on the cheap side compared to historic valuations.” Basically, this statement is a firm grasp on the obvious. If you can only get zero interest in your money market account, but a vanilla index such as the S&P 500 generates a dividend return of 2.2%, why would you ever invest in cash? Basically, that is what the richest man in the world is questioning. I question it every day and in return I get blank stares from potential investors who do not find it as obvious.

Some of the following items are clearly controlling the upward trend in the markets. Have you even for a second considered the potential of the economic benefits of repatriation of foreign earnings to the U.S. For reasons too technical to explore in this short article, U.S. corporations that earn profits overseas are not taxed on those profits until they are brought back to the United States. At the current time, to do so would create a 35% tax, which is prohibitive and therefore those profits are not being brought back home. Under the proposed bill to reform income taxes in Congress, there would be a special rate of 10% to encourage U.S. companies to bring those profits back to the U.S.

It is now believed that roughly $2 - $3 trillion (not billions, but trillions) are parked in overseas accounts that would be tempted to be repatriated. Let us assume that $2.5 trillion is repatriated back to the United States, generating a cool tax bonus of $250 billion (a 10% tax rather than the current 35%). If you want to know the way that the infrastructure in the U.S. could be reformed, there it is in one sentence. A tax of $250 billion specially allocated to major interstates, bridges, airports, naval ports, airline software, navigation and upgrades. Can you even envision how many U.S. workers could be employed under this one simple provision mentioned above?

That is the obvious solution to many of the problems with infrastructure, but think about what happens to that repatriated money. U.S. corporations would be encouraged to make acquisitions at improving stock prices, paying dividends to shareholders, buying back stock, etc. Each and every one of these actions would create higher income taxes to the Treasury, thus improving the deficit. If the U.S. based companies were to bring back this cash to the United States, pay an appropriate amount of tax and then use that money to expand their businesses, virtually every aspect of the U.S. economy would be improved. This is one of the reasons that the stock market climbs in the face of the overwhelming negative news that surrounds us every day. Maybe “fake” news.

The economic news for the month of April continues to be good. The U.S. economy produced 211,000 jobs during the month of April and the unemployment rate was down to 4.4%. As I have often relayed in these postings, when I was in college, they taught us that 5% unemployment was considered full employment. Today, the unemployment rate is significantly below that 5% level at 4.4%. I know many employers seeking current employees that post jobs and are getting zero responses. It has been a long time since I have personally seen excess jobs with not enough people to fill those jobs. That is a great sign for the economy. So much of the negative news on unemployment has been focused on the U6 unemployment rate. For the technically challenged, that means underemployed. Even that fell to a post-crisis low of 8.6%. You may recall that in the height of the 2007-2008 recession, that rate was a stunning 16%. Over the last one-year period, there have been 3 million new jobs created, putting these people to work, along with their families, relatives and local merchants. The economic news on unemployment could not have been better.

Most of the largest companies in America have finished reporting earnings for the first quarter of 2017. At the current time, it now appears that the first quarter profits of 2017 will be higher than the first quarter profits of 2016 by a very impressive double digit increase. My statement above regarding the prices of stocks being somewhat higher than the historic average of the last 25 years does not contemplate a double digit increase in earnings as we go forward. That is past earnings, not future earnings. If you build into your models an increase in corporate earnings by double digits, by any historic standard, stocks are cheap.

But the best economic news I will save for last. It is my opinion that the news of the upcoming tax reductions will have an economic effect only matched once before in this country. If you think earnings of U.S. corporations are good now, factor in an income tax rate decrease from 35% to 15% and you will see corporate earnings explode upward. How could the stock market ignore the potential for overnight corporate America to receive a benefit to their bottom lines by reducing corporate tax rates? If you modeled in a 10% increase in earnings as mentioned above plus an almost 50% cut in income taxes, all of a sudden, the price to earnings ratio of corporate America is no longer 21, but 15 – much below historic standards!

We should also put to rest any doubt that the economic theory of bigger government and higher taxes practiced over the last eight years is dead and the economic proof is not only overwhelming, but resounding. Economic growth over the last eight-year period was an astonishing low 1.47%. In all the other recoveries from recession, the economic growth has been 3.4%. There are many that believe that this low growth was exaggerated by higher income taxes forced on the economy, a much higher level of administrative oversight and an astonishing lack of economic stimulus during this eight-year period. You may recall that tax rates were increased dramatically under the Obama years. Federal revenues were supposed to rise by $650 billion over the following decade because of the 2013 tax increase; however, that was not an accurate forecast. Revenues are now projected to fall by almost five times that amount because economic growth continues to falter. Therefore, in everyday terms, it is the consensus of most that if you increase taxes, federal revenue should grow but in reality, an increase in taxes draws down growth. Rather than an increase in revenues to the Treasury, it actually falls.

Go back to the years preceding Ronald Reagan’s presidency. From the period 1974 through 1980, GDP growth was 2.5%. Clearly, the country was in recession and inflation was high when President Reagan took office in 1981. However, one of his first moves was to cut marginal tax rates, increase defense and cut entitlement spending and reduce the regulatory burden. I am unsure whether or not you have noticed, but this is the exact strategy that President Trump is following. Once those policies were in place, economic growth averaged 4.6% during the remainder of his presidency. More importantly, federal revenues grew at double digit rates during four of his last six years in office. Now compare the economic record of the Reagan years with the economic record of the Obama years.

So, the biggest economic news going forward is the potential that economic growth would make up for the reduced rates, and therefore whittle away at the current huge deficit. But there is also unbelievably good news regarding employment in the U.S. President Trump’s attempts at creating better trading patterns with the rest of the world have already shown fabulous economic benefits. Countries around the world are now spending money in the U.S. to manufacture as well as employ U.S. workers. If you gave them the 15% tax rate in the U.S., you would see an overwhelming flood of foreign companies creating jobs in the United States. You would also see U.S. companies bringing manufacturing back to enjoy this 15% rate. Good times are coming – watch and see.

We talk daily about a so-called border tax, but no border tax would be needed if we had fair economic policies around the world. As an example, virtually all of the shrimp sold in the United States is imported from China, Indonesia and their bordering countries. They import that shrimp at virtually no import tax. However, U.S. fisheries cannot export into China without a 30% tax. If you equalize those rates, economic expansion will occur on both sides.

Over the weekend, China announced that once again, U.S. manufacturers can ship meat into China. If you do not realize that concession by China was not of their making, you do not understand economic pressures that the U.S. can have on the rest of the world. We all believe in free trade, but it has to be fair trade. I think the current president has proven that if you threaten foreign countries with no free trade, but equal trade, they will manufacture in America rather than in their own countries. The economic growth of the U.S. drives the economies of the world, since they all export to America. If you have equal trade, it would be much more beneficial for them to produce here than at home.

As I sit and watch the endless debates on totally irrelevant subjects by Congress, I wonder who understands this nonsense. Other than politicians, who really cares who the FBI director is? Who really cares about who insulted who? What I care about are economic results and they are happening at the current time. If legislative policy follows the predictions made herein, now may be the finest buying opportunity in equities that we have seen in our lifetime. Yes, I understand that is a bold statement. However, if you are not invested, you will never benefit.

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

Best Regards,
Joe Rollins

Monday, April 17, 2017

Closed for Tax Holiday

Please note that Rollins & Van Lear and Rollins Financial will be closed on Friday, April 21st, in order to relax after a very "taxing" past couple months! Thank you for your understanding and for allowing us the opportunity to serve you once again.

We will resume normal business hours beginning Monday, April 24th at 8:30 a.m. If you have any pressing matters that require our immediate attention on Friday, please do not hesitate to contact any of our staff via email:

Joe Rollins at jrollins@rollinsfinancial.com
Robby Schultz at rschultz@rollinsfinancial.com
Eddie Wilcox at ewilcox@rollinsfinancial.com

Thank you and have a great weekend!

Wednesday, March 29, 2017

It is happening... The truth behind fake news.

From the Desk of Joe Rollins

I intentionally held up the posting of my newsletter for February just so I could evaluate the economic news associated with the political slugfest that is ongoing these days. In this posting I am going to give you a lot of good news about the economy and what we should expect going forward. It is important to understand that so much of the information that we receive is tainted by the political bias of the writers. Sometimes, you have to go through several levels of very tedious economic data to understand what is truly going on. If you are guided by the overwhelmingly fake news that appears in so many of the publications that I read, then yes you will be terribly misinformed. The news is good!

Ava's Ice Skating Competition

Snorkeling in Mexico - February 2017

Vacation in Cancun - February 2017

The stock market was nothing short of spectacular during the months of January and February. The S&P was up 4% during the month of February and is up 5.9% for the two months ended February 28, 2017. More importantly, it is up 25% for the one year ended February 28th. The Dow Jones Industrial Average is up 5.9% for the 2017 year and 29.4% for the one year period. The NASDAQ Composite is up for the two-month period 8.4% and is up a sterling 29.4% for the one year period then ended. In comparison, the Barclays Aggregate Bond Index is up 0.8% for the two months ended in February and is up 1.2% for the one year ended February 28, 2017. You do not have to be a rocket scientist to see the trends in the above numbers. Clearly, bonds are trending down and stocks are trending up.

I am not a big advocate of reviewing past history in order to predict the future. There is the old Wall Street axiom, “You can’t see the future through the rearview mirror.” I did, however, find the following from Sam Stovall, a long-term market watcher, particularly interesting. He indicates in a current writing that since 1945, there have been 28 instances where the S&P 500 has registered gains in both January and February. In those 28 cases, 27 have ended the year with a total positive return. All of that is pretty interesting, but what I find most intriguing is that of those 27 instances where the market was up in January and February, the average
gain in those years was 24%. I recognize that you cannot rely upon history for future performance, but let us hope that particular example is close to correct.

I thought in this posting I would list current economic discussions in order to give you a better idea of how positive things have become, from an economic standpoint. With the press being overwhelmingly critical of the Trump administration, there has been some positive economic news that drowns out the negative drumbeat of fake news. I think this economic information transcends political correctness, regardless of your political views.

1. OBAMACARE. Last week, the changes to Obamacare went down in flames, and frankly that is nothing but a good thing. The bill was flawed with problems from the very beginning. It was poorly constructed and no one ever gave it enough thought before passing it along. If you consider that only 13 million have Obamacare (the Affordable Care Act) as compared to 330 million people in the United States, it is a subject hardly worthy of conversation. In fact, due to the changes in Obamacare, we disrupted insurance of 250 million Americans with insurance in order to benefit 13 million. In addition, we created a monstrosity of governmental inefficiency, showing bureaucrats at their worst.

We should learn by our mistakes and fix Obamacare by making it simple. It would have been much less expensive to put in the two provisions that everyone likes about Obamacare, which include coverage of preexisting conditions and keeping your children on the policy until age 26 than going out and buying a medical insurance policy from the private enterprise for these 13 million people. All of Obamacare could have been easily eliminated by using the private sector, rather than the public sector, to provide insurance to these people without current insurance. Going forward, we must sell insurance across state lines and remove all of the political obstacles standing in the way of cheaper health insurance.

It was a good deal for everyone that the proposed Obamacare changes failed because the bill itself will implode shortly. It is so poorly constructed and so poorly executed that within a couple of years virtually no one will be covered by the plan anyway. At that point, we will be free of throwing additional money at a losing concept and actually begin to cover these people in the private sector. Regardless of your political view, this is a win-win situation for all and it is a clear undisputed benefit to the Federal budget.

2. TAX CUTS COMING. One of the major benefits of the Obamacare failure is that now, rather than later, we can move on to more important things, like tax cuts. Compared to the contentious nature of Obamacare, which political party would not want tax cuts? I expect this debate to be relatively short and approved before the end of the summer. The tax cuts that are instituted will have a major effect on increasing the American economy. This is very much a positive for both investing and your wallet.

3. REPATRIATION OF INTERNATIONAL FUNDS. It has not received much publicity lately, but the money coming back from overseas could be in excess of $1 trillion. This money coming back to the U.S. will create a lot of positive economic benefits. Dividends will be paid by U.S. corporations, which will increase income taxes, and buybacks will occur which increases the value of the stocks and creating income taxes from the sale of those stocks. In addition, if there is a 10% repatriation tax, that alone raises $100 million in immediate taxes that would be payable. There are so many benefits to this bill that I am almost shocked that it was not approved a decade ago.

4. WORLD ECONOMY IMPROVING. Don’t look now, but the rest of the world’s economies are improving. For the first time in many years, we are seeing the Chinese economy pickup despite the Trump administration’s threats to China. You do not have to read the official GDP reports to see it happening. Rail freight is up 10.4% in China year on year. Electrical production is 8.5% higher year over year. Domestic credit growth is growing at 9.7% year over year. Those numbers are not to be refuted. The economy and GDP in China is clearly going up – regardless of what the press says.

We are also seeing a positive explosion of the economy in Vietnam and almost all of Latin America is operating at full capacity. Even in Europe, the economy has turned positive and for the first time in decades, Japan has a positive GDP to report.

It can even be said, and many would agree, that as the U.S. economy grows, so grows the rest of the world. What clearer example could we have than 2008? While the U.S. fell into serious recession in 2007 and 2008, it has come roaring back since. Other countries that also felt that recessionary cycle are now clawing their way back into positive economic growth. If you do not believe that the U.S. is the economic engine to the world, then you have not closely studied the competitive analysis showing that parallel.

5. THE U.S. ECONOMY. There is so much positive occurring in the U.S. economy that it is hard to believe that the major market reporters cannot explain it. Maybe that is fake news in the making. The unemployment report recently indicated that unemployment was down to 4.7% during February, and for all the right reasons. There were more people participating in the work force and finding better jobs. As I often mention, for every job created, roughly eight new people are being supported in the economy. That one job not only creates support for the worker’s family, but also supports the local grocery store, hardware store and others. The compounded effects of even one new employee have an incredible economic impact. That is what is happening now as we reach full employment and the economy continues to strengthen.

Did you realize that, percentage-wise, there are fewer vacant homes in the United States now than ever? In 2006, there were 17,000 vacant homes in America. At that time, the U.S. population was 298 million. Since that time, the population has grown to 323 million, an increase of 8%, yet there is the same number of vacant homes today as there were then. If you look at all the demographics of home building, the construction of upscale homes is certainly the trend. However, the inventory of starter homes necessary to meet the needs of the mass population growth has yet to begin. You will see an explosion in growth of lower priced homes to meet this demand over the next decade. This increase in construction will drastically increase the number of people working in home construction and will strengthen the economy. The fact that the American population is getting richer along the way means there will be more wealth available to purchase luxury goods, increasing the economy even further. It is estimated by the Federal Reserve that from the start of the real equities bull market during the first quarter of 2009, America’s wealth has grown by a cool $38 trillion. Yes, trillion not billion. This growth is not only in equity prices, but also real estate values and other assets.

There is no question that by economic standards the stock market is high. But it certainly will not go down as a euphoric market. As I sat down to begin this blog, I read three articles on Yahoo expressing the dire possibility that the financial markets could drop as much as 60% over the next 12 months. Such basic cynicism is certainly not a sign of market euphoria. We now know that corporate earnings for the fourth quarter of 2016 were roughly 23% higher than the previous year, and there are many who are projecting earnings will be 25% higher for the first quarter of 2017, compared to the same quarter last year. The current valuation of the stock market, while high, neither comprehends nor includes projected earnings increases. If you were to map out this type of earnings growth, the U.S. market would actually be considered undervalued. If, in addition to undervalued earnings, you were to assume a large income tax decrease, as proposed by the current administration, the market could go much higher. While none of us are certain what the future holds when it comes to legislative matters, the evidence is clear that earnings are improving not only in the U.S. but also around the world.

As you broaden the base of the middle class in China, Mexico and Southeast Asia, you will improve earnings in corporations in all of those countries. I recently returned from a trip to Mexico, south of Cancun, where I have been going for over 30 years. There is overwhelming evidence that the economy in Mexico is improving and the standard of living as a whole has improved dramatically as well. In this part of Mexico, there is a clear middle class that has evolved from an area that 25 years ago, was filled with poverty and no hope for the future. Since hospitality is the primary form of economic improvement in this area, you could probably thank the Americans for a great deal of this improvement. But it is happening around the world. Economies are getting better everywhere, which will lead to higher stock prices.

In summary, we have the trifecta of good economic news. Interest rates, while going up slightly, continue to be outrageously low and not likely to go up much going forward. Earnings are improving around the world, which will lead to higher stock prices. The economy is stabilizing, growing, and in the rest of the world, the economies are growing with us. If you add those three components to a U.S. administration that wants to improve the economy and grow it instead of regulate it as the prior administration did, you will likely see significantly higher prices in the future. It will not and should never be thought of as a straight up projection. There will be ups and downs, starts and stops, but if you invest rather than speculate, you clearly will see higher stock prices in the future. I could write so much more positive news, but for the sake of your boredom, I will recite them next time.

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

Best Regards,
Joe Rollins

Wednesday, February 8, 2017

The earnings recession is over - that is a good thing!

From the Desk of Joe Rollins

Every quarter for the last three years, all anyone can talk about when valuing the stock market is how the overall earnings of the Standard and Poor’s Index of 500 Stocks have gone down. This is principally because the earnings of the oil companies have pretty much been a disaster since the price of oil has now fallen roughly 50% (and 75% last summer). These oil companies represent a large component of the S&P earnings and have dragged down the other companies. But hold onto your seats – the earnings for the fourth quarter of 2016 are now pretty much assured to be up 8-9%. Not only is this a net positive increase of earnings, it is a dramatic increase. In addition, every quarter in 2017 is now forecasted to be higher, percentage wise, than a comparable quarter in 2016. As I have predicted over the years in my blog postings, nothing impacts the stock market more positively and more convincingly than an increase in earnings. I have a lot to discuss in this blog since the news has been coming fast and furious since the inauguration of President Trump, but first I want to reflect on how good the month of January actually was.

There is an old saying on Wall Street, “As goes January, so goes the year.” If that actually proves to be true, then 2017 could be a sterling investment year for us all. For the month of January, the S&P 500 Index was up 1.9% and over the one-year period up 20%. The NASDAQ Composite had a sterling month of 4.4% and for the one-year period is up 23.2%. The Dow Jones was up a laggard 0.6% but still up 23.9% for the one-year period. Of course, the laggard as you would expect with interest rates increasing would be the bond index. The Barclays Aggregate Bond Index was up 0.2% for the month of January and 1.2% for the one-year period. If you have a high concentration in bonds in your current portfolio, there is a high likelihood that you will be disappointed with your investment results this year. It is almost a “slam dunk” that the Federal Reserve will increase interest rates at least twice, probably three times, in 2017. They have the cover to dramatically increase rates without dragging down the economy. I think it is a given that we will see rate increases periodically during 2017, which will adversely impact bonds.

Harper, Ava, Lucy & Caroline at the Grand Ole Opry

Swimming in January!

Studying the stock market with CiCi

Before I write my commentary, I want to make sure that everyone understands that I really do not care about politics. What I do care about deeply though is the affect that politics has on the economy. To the extent that actions by Congress affect the economy, I have the utmost interest. Therefore, my reflections below are more concerned about the politics of the economy, not the politics of popularity.

If you are not excited about the economy with all that newly elected Trump has done in the last three weeks, perhaps you do not know how to read The Financial Tea Leaves. Yes, I understand it has been volatile and confusing. Sometimes the tweets get more attention than the underlying policies, but the policies have been dynamic and each are designed to improve the economy. Already, in just this short time period, the President has implemented the following:

1. A slowing down of Obamacare, which was a drag on business and a regulation nightmare.
2. Authorization of the Dakota Access and Keystone XL pipelines. Both of these pipelines work towards bringing the U.S. closer to energy independence and create multi-thousands of high-paying jobs in construction, which are high paying and extraordinarily beneficial to Americans. In addition, all of the steel pipe will be built in America, which is helping an industry that has clearly suffered over the last decade.
3. Proposed executive order that regulations by the government be dramatically reduced, getting government out of private businesses. The new executive order requires that for every new regulation, two must be deleted. This is nothing but positive for the economy and all Americans working in the U.S.
4. Proposed border tax, which will create more jobs in America. The car companies will be hard pressed to build manufacturing plants in Mexico if a tax is attributable to any car sold in America. For all of you who are really worried about trade war, that is a worry you can forget. The United States is the strongest and most powerful economy in the world. Everyone wants to sell in the United States. They need us more than we need them. Already, we have seen the largest manufacturer of Apple iPhones in China has already committed to building a plant in the U.S. European car companies are now scrambling to relocate the production of cars from Europe to the U.S. Even though absolutely nothing has happened, more jobs have been created and promised in three weeks in the U.S. than we have had in the last decade.
5. A commitment to repatriate $1-$2 trillion in foreign money to the U.S. with preferred tax rates. If you needed to point to one thing that would create jobs and wealth in America, this is it. It is almost more embarrassing that the U.S. corporations parked $2 trillion in cash overseas just because they are afraid of taxation in the United States. We need that money back in this country to create more wealth.
6. Proposed a tax decrease for both corporations and individuals that will dramatically increase the economy, create more jobs, and the item that we are most interested in, build wealth. I know most of you are not as old as I am, but if you go back and look at the U.S. economy under Ronald Reagan beginning in 1980 through 1988, you will see the dramatic increase in the economy that lower tax rates can create. Those of you who are concerned that these lower tax rates will create deficits have not been watching very closely over the last eight years. Despite having the highest tax rate we have ever had in the United States, the national debt in the United States went up $9 trillion during the Obama administration. You do not need to be a rocket scientist to understand that higher income tax rates are detrimental to the economy and therefore create more deficits than lower tax rates. John F. Kennedy proved this in the 1960s, Ronald Reagan proved it in 1980 and I am absolutely convinced lower tax rates under President Trump will improve the economy and reduce deficits, not increase them.

I am an avid reader of Barron’s which comes out every week. The lead article on the cover of Barron’s last week was Next Stop, Dow 30,000. Basically, the article indicates that the Dow should be at 30,000 by the year 2025. Given that it is roughly 20,000 now, what does that really mean as it increases over the period from 2017 through 2025? While on paper this sounds like a dramatic increase annually to go from 20,000 to 30,000 in the next nine years, if you do the math, the increase is a relatively modest 4.6%. If you will review the blog that I posted on January 3, 2017, you will note that over the last 14 years, the S&P 500 has been up an impressive 9.12% on an annualized basis, and this includes 2008, when the S&P was down 37%. So, to project 4.6% growth over the next nine years, I think, by most people’s definition, would truly be quite modest. If you increase that gain to a more normalized 7%, the Dow would be closer to 37,000, not 30,000. We have a unique opportunity to build wealth over this next decade, yet there are so many people underinvested who will not get to participate in that wealth.

For many years, I have been advising clients to contribute annually to an IRA, whether it is deductible or not. If you qualify for a Roth, you should beg, borrow or steal in order to participate. You should never pass up on an opportunity to put money away on a tax-exempt basis for the rest of your life, and for the life of your beneficiaries. However, despite begging clients to contribute many still will not listen. I hope you understand the benefits of investing on a regular basis and take advantage of IRAs for this year and last year, as well as every year going forward.

Economically, it is impressive how much has been accomplished in only three weeks. I guess for every negative one can point out, I can illustrate multiple positives. It now looks like the S&P earnings with the proposed tax cut could jump up to as much as $142 this year. That is a dramatic increase in earnings, which will result in higher stock prices. While the “doomsdayers” have insisted the increase in the dollar would dramatically hurt U.S. earnings, this just has not been proven to be correct. The dollar has risen 25% since July 2014, due to higher interest rates in the United States and a weakened euro. However, it is interesting to note that with a 25% increase in the dollar, earnings have not been affected that much. People do not fully understand how sophisticated big corporations are in hedging currencies and avoiding big swings in the dollar.

The other exciting economic revelation is the dramatic decrease in regulations for banks. Ever since 2008, banks have been stifled in their opportunity to help the U.S. economy. Yes, I understand that 2008 was a dramatic shock to the world economy, but as congress does with virtually everything they touch, they overregulated it. By implementation of a hodgepodge, unorganized and uncoordinated regulation avalanche, banks have been much better served by holding their money rather than lending it. If banks got back to a normal lending environment, you would see the economy benefit dramatically. I will give you a personal example to point out how completely inane the current regulations are. Just recently, we had a client who was interested in purchasing a home and had enough cash for the house, three times over. Since she wanted to build up her credit and utilize her cash for investing, we attempted to finance a small portion of the house with a local lender. Despite her significant wealth, substantial assets and ability to pay cash for the house, she was unable to obtain a home mortgage loan. I will not go into further detail about how upside down these current regulations really are, but it does look like they will be significantly reduced.

I watch earnings closely, as do most people who invest in the stock market, and if you are not blown away by the earnings in the technology sector, you must not be watching closely. Companies such as Microsoft, Alphabet, Facebook and Apple recently posted earnings that are nothing short of extraordinary. These companies essentially create software and communicate with the world. While there is some manufacturing involved with Apple and Microsoft, their real business is technology. These earnings have increased dramatically year over year, and the projections for the current year are even higher. This increase in technology will prevent any trade war with the United States, since it can be exported around the world by the push of a button. The U.S. controls software that drives computers throughout the world and that is not going to change. No other country has the capacity, ability or innovative technology that would rival the software in the United States. Any trade war with the United States would clearly include software, and no country in the world could risk not having the U.S’s software capabilities.

As you can tell from above, I feel good about what has occurred in the economy in the last three weeks. In fact, I have not been this excited about the economy in years. Who would have thought that in three weeks we could solve major problems and free the economy to produce at a high level? I think we will see major manufacturing around the world come to the United States to avoid trade duties. They can produce just as well in the United States and avoid huge transportation costs. You will see not only Europe manufacturing in the U.S. but also China, Japan and Southeast Asia. All of this will be positive for the U.S. economy and in turn, good for the stock market.

On a side note, I was watching a special on HBO this past weekend regarding Warren Buffett. Buffett, who is probably the second or third richest man in the world, admitted that he never spends more than $3.17 on breakfast, and has no computer or telephone on his desk. But the item that really got my attention was when he commented on his health. He said that he checked the actuarial tables and found that six year olds have the lowest death rate and, therefore, eats like one. The most alarming aspect of his diet is that he drinks at least 5 Coca-Cola’s per day – and not the diet kind. Considering he is 86 years old, he might be onto something. Perhaps I will revert back to the diet of a six-year-old as well…

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

Best Regards,
Joe Rollins

Tuesday, January 17, 2017

The year 2016 in retrospect - a year of volatility.

From the Desk of Joe Rollins

Before I start talking numbers, I thought I would share some pictures from the end of 2016.

One World Trade Center in NYC

Ava and a Rockette at Radio City Music Hall in NYC

Dr. and Mrs. Dooley's grandchildren (long-time client)

Family Christmas - 2016

There is no question that the 2016 year was a year marked by extreme ups and extreme downs in the stock markets. Although the economy was about the same for the entire year, the markets moved up and down to economic activity perceived by traders, but unseen by economists. It was quite an interesting year from an investing perspective, and since there were so many events that moved the market, it was really hard to know whether you should have been invested or not.

The year started out in an almost disastrous mode. The first two weeks in 2016 were the worst two weeks of investing in the history of the United States. The Dow and S&P fell a nerve-racking 8% in that first two-week trading period, and the NASDAQ Composite was off even more at 10%. By the middle of February, the S&P 500 was down 13% for the 2016 year and those who were forecasting the ultimate collapse of the American economy were everywhere. Even major financial houses exclaimed to anyone who would listen, “Sell your stocks and get in cash before the huge stock market crash occurs.”

Shortly after all that was said, the markets recovered nicely in March and the first quarter ended almost even. Optimism, as compared to pessimism, ruled April and May and the markets moved higher before the fatal Brexit vote on June 23, 2016. After that vote, the market sold off sharply before rallying back at the end of June to end the second quarter with the S&P and the Dow Jones Industrial Average up around 4%, but the NASDAQ was still negative for the year.

After the first six months of 2016, I was hopeful that would be all of the volatility we would see for the year 2016 - little did I know what bombshell would drop later in the year. As I predicted from the first of the year, the economy would be stable and the financial markets were likely to return at least 6.8%, but it would not surprise me to see double digit returns for the 2016 year due to increasing employment in an economy that was strengthening,. The third quarter ended with a nice rally over the summer months. However, beginning in October we saw high volatility based upon the political pundits’ projection of an easy Hillary Clinton win in the Presidential election. The markets traded in wide swings based upon virtually every comment made by the politicians. Going into the election in early November, all of the gains for the year had evaporated and the markets were essentially flat preceding the Presidential Election. Many, myself included, predicted that the election of a politician with the same political and economic beliefs as the current administration would be uneventful. Boy, were we wrong!

After the election, all hell broke loose. The markets swung wildly due to the opposing optimistic and pessimistic outlooks of the political parties. The financial sector then rallied dramatically with the thought that banking regulations would be repealed. And before we knew it, growth funds were out and value funds holding financial stocks came into favor, sending the growth sector into a downward spiral as the value sector shot up.

Even more distressing was the absolute thrashing that the international markets endured. Obviously, the new president-elect would never purchase anything from China or Asia again (insert eye roll) so those markets sold off 15% after the election. Yes, 15%! I would say this is laughable, except it is not when you look at the big picture, and consider how many people it impacts. These markets are the cheapest markets in the world, yet traders do not trade based upon economics, they trade based upon daily changes in sentiment for the future.

The president-elect’s open disdain for Latin America caused those markets to also suffer double digit losses. In fact, with the strengthening of the dollar, due to the increase in interest rates in December, the entire world sold off compared to the U.S. stock market. Despite these international markets being priced at a level for significant gains in the future, traders were not willing to listen to what was happening at that time, and chose to rely on what they perceived to happen in the future.

I am approached by a lot of people who, even today, say the markets are overvalued. I would have to disagree with that opinion based not only on the perception that the government will finally start getting out of the way of the private sector and allow innovation and growth to occur without the intervention of needless regulation and government policy, but also on economic facts. For the last several years, the S&P 500 has been on a negative earnings trend. I guess it could be argued that a good deal of that trend relates to the price of oil. You may readily recall that the price of oil in 2014 was $100 per barrel. At the beginning of 2016, the price had fallen dramatically to $30 per barrel. At one point in the spring of 2016, the time of year when oil tends to rally before the prime summer driving season, the price of oil dropped to $25 per barrel. Before the end of 2016, oil had essentially doubled in value to $50 per barrel but the damage to the earnings of the oil stocks was dramatic and a little mind boggling to the average investor looking in from the outside.

As I have often written in past blogs, the most important component to stock valuations is their earnings. For the year 2016, the earnings for the S&P 500 are projected to be $109 per share. If you would expect the market to continue to grow in 2017, you would have to assume that earnings would also be growing. I am sure there are many people who think that I make up these numbers, but the S&P earnings are well documented on the Standard & Poor’s U.S. based website. For some light reading, check it out for yourself: http://us.spindices.com.

They report earnings that are constantly changing but are readily available based on current information. On the website, it reports earnings for 2016 are $109, but for 2017, they project earnings to be $131 (or a 20% increase over 2016 earnings). And in fact, they project for 2018 earnings at $147 (a 12% increase over the projected 2017 earnings). In essence, the 2016 earnings of $109 will grow based on this information to $147 over the next two years, or an increase of 35%. It is hard to fathom that the market could in fact go down based on these dramatic increased earnings over the next two years.

These earnings are currently posted, but they do not reflect the reality that maybe the economy actually will get better in 2017. There are many economists now projecting that with the new administration, the U.S. economy will increase in GDP growth from the current 2% range to as high as 3.5%. If in fact a growth in GDP occurs, it is almost assured that the earnings report above will be higher. However, one of the most important considerations that the doomsday crowd is missing is the potential for a lower tax rate in the United States being approved. The president-elect has proposed that the current federal tax rate for corporations of 35% be reduced to 15%. While certainly there will be some offsets if that tax decrease occurs, reported earnings will go up significantly. I keep hearing the opposing masses say that the 35% rate is artificial and that no U.S. corporation actually pays that type of rate. While to a certain degree that is correct, their reported earnings all reflect a 35% rate because current accounting laws require that rate to be accrued based upon the maximum amount and maximum rate. It is estimated by some economists that this decrease in income taxes will dramatically improve earnings and that increase could be $14 per share, if not higher.

Therefore, to make an estimation of the year-end 2017 S&P value, you just need to work with the numbers that are currently available. If you take the $131 per share projected by the S&P earnings and you increase it by $14, the projected decrease in tax rates, you can see what the projected S&P valuation might be. I will assume for the purposes of this calculation that the tax rate only improves earnings by $7 or 50% of the projected level. Based upon that analysis, you are currently estimating S&P earnings for 2017 at $138 per share. If you add a multiple of 17 as I have done through the years, then the S&P would be 2,346 at the end of 2017. The year began at 2,238, therefore an increase of 108 per share or a positive return of the S&P at 4.8%, plus the dividend rate of 2.1%, for a total increase for 2017 of 6.9%.

If you will also assume that the economy picks up in 2017, then a higher multiple would be warranted. Therefore, an 18 multiple would yield a year-end valuation of 2,484, or an increase of 246 for a return of 11% for 2017 – and don’t forget the dividend yield of 2.1 for a return of 13.1%. Therefore, my fearless projection for the 2017 year would be somewhere between the 17 multiple and the 18 multiple.

If you do the statistical average of those two ratios, you end up with a double digit projected return in 2017 of approximately 10%, which includes the dividend growth of 2.1%. Therefore, for 2017, I once again project a double digit return in financial assets for this upcoming year. If you will review my blog from January 3, 2017, you will note that the last 13 out of 14 years have been positive on the S&P 500 Index. If 2017 works out as projected herein, that would mean that an overwhelming 14 out of the 15 previous financial years have been positive years for the broad-based S&P Index of 500 Stocks.

The S&P ended the year with a total gain of 12% for 2016, a five-year return of 14.7%, and a 10-year of 10.9%. The Dow Jones Industrial Average was up a sterling 16.5% in 2016, with a five-year return of 12.9%, and a 10-year return of 7.5%. The NASDAQ Composite, which reflects smaller capitalized stocks, was up 8.9% in 2016, 17.1% on a five-year return and 9.5% over 10 years. In comparison, the Barclays Aggregate Bond Index was up 2.5% for 2016, up 2.1% for the five-year period and up 4% for the 10-year period. As can be seen, the bond index has significantly underperformed any of the broad indices above.

As I mentioned earlier, 2016 was an unusual year in that growth investments well underperformed value. There are many investors wondering why their 2016 return was significantly below the recorded index of 500 stocks. The simple answer to that is that most of that growth occurred after the election and in financial assets (banks). Under the assumption that the president-elect will significantly reduce banking regulations, financial stocks dramatically rallied and in some cases increased 30%-40% over their pre-election levels. This huge run-up in the financial sector dramatically altered the returns and were not representative of the growth of the economy. As I have always pointed out, we invest for growth over the long-term, not for short-term valuations. We think growth will outperform value over any relative time frame above five years, as I believe history has supported that position. However, since the election occurred near the end of the year, the growth in these value stocks was well in excess of the growth realized in the growth sectors.

I am very optimistic going into 2017 that we will see growth overtake value. If the president-elect is successful in accomplishing even some of his stated goals of lower taxes, lower regulation and lower government involvement in private industry, there is a high likelihood growth will take off to a much higher level. If all of that occurs, corporate earnings will go up and the acceleration on the economy will lead the rest of the world’s stock markets higher, even if they are kicking and screaming along the way. Things look really good for 2017 in both the economy and corporate profitability so I would certainly anticipate corporate earnings to accelerate, pushing financial markets even higher. I guess now we will just have to wait and see if the vision of a better economy actually comes to realization or whether it is just an illusion….

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

Best Regards,
Joe Rollins

Monday, January 9, 2017

Craig Sager (1951-2016)

From the Desk of Joe Rollins

Many of my clients know that I had a long-standing relationship with Craig Sager, which was as colorful as Craig was when he dressed for his TV appearances. Craig recently passed away after a three-year fight with acute leukemia. Craig was one of those individuals who you thought would never die. In the 30 years I have known Craig, I cannot remember a time, prior to his leukemia diagnosis, when he was not in top physical condition.

While attending college, Craig was the mascot on the Northwestern University campus in Chicago, Illinois. More importantly, according to Craig, he was also the President of the Delta Tau Delta Fraternity. This was the actual fraternity house that the movie Animal House was based upon, and he assured me that his recollection of the fraternity was just as rowdy and colorful as the movie.

In 1987, I was approached by two of my NBA clients who were considering investing in a restaurant in Atlanta. I told both of them that the investment was not very smart, and it would just be a matter of time before they lost their money. Against my advice, they invested anyway deciding they would have fun while it lasted. I was not involved at all in those early days, but was shortly after, much to my surprise.

1987 - The Original Jocks
Randy Wittman, Craig Sager, Doc Rivers, Mike Small & Scott Hastings

1988 (or so) - I was added to the Jocks crew.

Around this time, I had become friendly with Craig Sager, since he originated the concept. To Craig, every day was a good day, and the next would certainly be better. When I was asked to come in and see why their bar was not successful, I did not realize the owners were transporting alcohol from Cobb County into the city of Atlanta, which unbeknownst to them was illegal. I also found out that the owners, comprised of professional athletes, had not applied for health licenses, liquor licenses or anything else required to operate a restaurant. After rectifying those shortcomings, I then became part owner of this non-thriving business that was losing money and appeared to have no future.

But the restaurant grew, and Jocks & Jills became the first sports bar in Atlanta and is still being copied by many new establishments opening up today. Our 10th Street location began with total sales of roughly $10,000 during an extremely good week. After 20 years, we owned the most successful sports bar in America and sales were $500,000 per week. We started with a total of five employees and had 1,500 at the end. Much of this growth in the business was due to Craig’s notoriety and his never-ending promotion of the restaurants. I ran the operations, he handled the promotions. It was an exciting time.

In retrospect, I could tell you many stories about Craig and the wild and crazy things we did over the last 30 years. One of my favorite Sager stories was when he invited me to play golf at Pebble Beach. Typical Craig, everything happens in the spur of the moment. On Thursday, he informed me that we had a 9:00 am tee time on Saturday at the world-famous Pebble Beach Golf Course, and if I would like to play he would meet me there. Purchasing a last-minute plane ticket to San Francisco was outrageously expensive, but I flew there on Friday and drove down the coast line, virtually in the dark, to reach the Inn at Spanish Bay at roughly 7:00 pm.

I checked with the front desk, but they had no knowledge of Craig Sager even being in the area. Given the rates of the hotel, I had become somewhat concerned that Craig had stood me up 3,000 miles away from home. The next morning, I checked with the front desk, and even with our tee time being less than two hours away, they had no record of him being on the premises. I was $3,000 into this trip and the tee time was not even in my name!

About 30 minutes later, I ran across Craig who had apparently shown up in the middle of the night and hadn’t bothered to book a room – just sat in the bar waiting to play. He packed no clubs and no change of clothes despite planning on leaving later that afternoon to spend a long weekend in Vegas. Typical Craig, he lived for the moment and tomorrow would be worked out later. After playing at the beautiful course, we headed back up the coastline toward San Francisco to part ways – I was flying back to Atlanta, and Craig to Vegas. Somewhere along the way, Craig decided he would just fly out of San Jose because the flight was cheaper. After dropping him off at the San Jose airport, I glanced back in my rearview mirror and there he was showering off under a local water hose before getting on the airplane. I would like to say that I could not believe it, but I have hundreds of stories about Craig which are mostly along the same vein.

1999 - Me and Craig at Pebble Beach

There were times when Craig and I would have conversations multiple times a day, and they were ALL positive. That is just the kind of guy he was; and when I introduced him to who would later become his wife, she was immediately drawn to his positivity and spontaneity as well. They subsequently had two children and reside in the outskirts of Atlanta.

There is no question that Jocks & Jills was amazingly successful and we definitely had a lot of good times during its heyday. Even more amazing is that this reporter out of Illinois, who jumped the fence when Hank Aaron hit his home run in 1974 (when he was making $95 per week), could end up being idolized on national television due to his contagious personality, close relationship with NBA players and outlandish clothing.

1974 - Craig Sager on the field when Hank Aaron broke Babe Ruth's home run record.

2016 - Cover of Sports Illustrated

Craig’s funeral was a couple of weeks ago, and it was heartwarming to see the personalities and athletes that showed up for the service. Even towards the end, I never really thought Craig Sager would pass away because his love for life seemed to overwhelm everyone around him. Although he is deceased, I wanted you to understand how far back we go and how deep our relationship was over the last 30 years. Around Craig, life was never boring – he will be missed.

Charles Barkley and Josh at Craig's service

"Joe, thanks for 30 years of friendship!" -Craig Sager

Best Regards,
Joe Rollins