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 $100,000 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

Tuesday, January 3, 2017

13 out of 14 ain't bad - a 93% win ratio!

From the Desk of Joe Rollins

My apologies to Meatloaf for somewhat borrowing his song title from 1977, “Two Out of Three Ain’t Bad”. Once again, the Standard & Poor’s Index of 500 Stocks had a double digit positive return for the year. Including the end of 2016, 13 out of the previous 14 years (reflected in the chart below) had a positive rate of return. If I were to give any of you a 93% chance of winning in Las Vegas, you would most likely all take those odds, yet every day we run across people who have not invested their cash due to their fear of losing money.

Next weekend, I will write a full report on 2016 as a whole as I have many things to talk about, including the unusual situation of growth not outperforming value. Also, I need to discuss the current valuation of the market, how the new President’s economics may affect the market as well as the rallies we saw after the presidential election. For the time being, I just wanted to get the good news out so that everyone could reflect on it over the next week before I write the full blog, along with my projections for 2017.

In my blog dated January 13, 2016, which can still be found online, I made my predictions for the 2016 year. After going through a fairly extensive calculation of estimated values, I projected that the S&P 500 would be up 6.8% for 2016. And good news for us, it was up even higher. If you will refer to my quote below from that blog, you will see that while I projected 6.8%, I realized the market had the potential to do even more.

Even though I project a 6.8% return on the S&P 500 index for 2016, I fully recognize it could be significantly higher if earnings came in at better than expected. It would not surprise me if total return for the S&P 500 index is double digits in this upcoming year.” (2016)

For the time being, I just wanted to update you on the good news and let you know that I will be writing the full blog over the next week.

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

Best Regards,
Joe Rollins

Wednesday, December 21, 2016

There's no place like home for the holidays.

In celebration of the Christmas holiday, our office will be closed on Friday, December 23rd and Monday, December 26th. Our regular office hours will resume on Tuesday, December 27th.

AND, in celebration of the New Year holiday, our office will be closed on Monday, January 2nd but will resume normal office hours on Tuesday, January 3rd.

If you have a matter that requires immediate attention while our office is closed, please contact Joe at jrollins@rollinsfinancial.com.

You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com or Robby Schultz at rschultz@rollinsfinancial.com.

Warmest Thoughts and Best Wishes for a Wonderful Holiday and a very Happy New Year!

Best Personal Regards,
Rollins Financial, Inc.

Monday, November 21, 2016

"What if, today, we were grateful for everything?" -Charlie Brown

In celebration of the Thanksgiving holiday, the offices of Rollins Financial and Rollins & Van Lear will be closed on Thursday, November 24th and Friday, November 25th. Our regular office hours will resume on Monday, November 28th at 8:30 a.m.

If you require immediate assistance during this time, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com.

Be safe, have a wonderful thanksgiving and please know we are very thankful for you!

Warm Regards,
The Staff of Rollins Financial

Thursday, November 17, 2016

"Every dollar released from taxation that is spent or invested will help create a new job and a new salary."

From the Desk of Joe Rollins

While doing research for this blog on the 2016 U.S. presidential election, I ran across some interesting quotes. I thought the one above was really interesting, so I did some additional research. Consider this is a quiz – can you guess which individual is responsible for the following quotes? Here is the first one: “Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not reduced – flow of revenues to the federal government.

Another interesting quote I found is, “In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxing is the best way open to us to increase revenues.

One more: “It is no contradiction – the most important single thing that we can do to stimulate investment in today’s economy is to raise consumption by major reduction of individual income tax rates.

Okay, last one: “The largest single barrier to full employment of our manpower and resources and to a higher rate of economic growth is the unrealistically heavy drag of federal income taxes on private purchasing power, initiative and incentive.

After reading all of the quotes listed above, it became fairly clear to me why the U.S. stock market is rallying on the prospects of President-elect Trump’s proposed changes to the federal income taxing system. By now, I am sure you are thinking that that all of the above quotes must have been made by a very conservative Republican, designed to benefit the wealthy and not the poor. However, it could not be further from the truth. Each and every quote above was made by President John F. Kennedy during his short presidential time from 1961-1963. Even in those years, JFK, a Democrat, saw the economic benefits of lower tax rates. Unlike the last eight years where we have constantly faced higher taxes and larger government spending, Kennedy, saw the benefit of lower taxes, an increased economy, higher GDP and more jobs.

I can vividly remember the night that Ronald Reagan was elected President of the United States in 1980. Much like President-elect Donald Trump promises, Ronald Reagan, the former actor, believed that cutting taxes would clearly stimulate the economy and tightening of financial interest rates would slow inflation. The combination of the two would lead to unprecedented growth in the U.S. economy, and in subsequent years would benefit all of us with a better way of life.

If you go back and reflect on the record, you will see that is exactly what happened. During the 1980s, with lower taxes, the economy expanded and through the George H. W. Bush years and Bill Clinton years, the economy expanded with lower taxes, employment was full and the federal budget was balanced. In fact, for the 20 years from 1980-2000, the S&P 500 index averaged 17.88% per year for the 20 years – wow! To me, it does not look like you would need any more proof that lower income tax rates stimulate the economy and the evidence is readily available from the example mentioned above.

I will be one of the first to admit that I incorrectly called the outcome of the election, along with 99% of the polls on the subject. Believe me, it was quite a roller coaster ride the night of the election. As I sat in front of my TV watching the results come in, I kept my iPad open watching the futures on the stock market react. At one point, around the time of the Pennsylvania returns, the futures were down well over 800 points for the evening. Around midnight, some of the circuit breakers kicked in and reduced the losses. And when I got up the next morning after only a few hours of sleep, the futures were down 375. As we approached the opening of the market, I felt a little better but it was still down 250 points. Interestingly, the very first tick on the Dow Jones Industrial Average was actually up and not down. In fact, the markets over the course of the evening moved from roughly 17,500 to 18,700, up over 1,200 points. Over the course of 7-8 hours, we watched the stock market perform a 1,200-point swing.

It would be impossible for me to evaluate the social and economic actions of the President-elect as clearly none of us have any idea of what he will actually do once in office. People must keep in mind that it will be 90 days before he takes office and likely years before any significant legislation is passed. However, I find his economic proposals certainly encouraging for a higher economy and correspondingly a higher stock market, just as John Kennedy recognized in 1960 and Ronald Reagan in 1980. He is basically proposing that if we have lower tax rates and provide less regulation, we will subsequently have a higher GDP, a better economy and full employment. You may think that is wishful thinking, however, that is exactly what happened in both President Kennedy and President Reagan’s cases. As demonstrated in the last eight years, we now know that higher taxes and more regulation do not lead to higher GDP nor reduced deficits.

I find many of the proposals so obvious that it amazes me that they were not done years ago. Currently, all major U.S. corporations that have international operations do not pay taxes on those operations until they bring the money back to the United States. With the United States having the highest corporate tax rate in the world, it is no wonder that few of these corporations will bring their money back to the U.S. at the current 35% tax rate. One of the proposals under the Trump administration would be to tax this money coming back at a one-time 10% rate. It is believed by many experts that roughly $1 trillion would reenter the United States creating a windfall tax of $100 billion in only one year. In addition, this money would be used to improve U.S. facilities, pay dividends and compensation - all of which would create additional income tax to help the economy. This situation has been going on for years, but the government did not react to it, costing the United States plenty of lost revenues. This law will surely pass.

Balcony of the Speaker of the House - 1995

Ava and Josh - 2016

When you go back and reflect on the fact that the lower tax rates under the Reagan administration led to a balanced budget in the 1990s for the Clinton administration, you see the blueprint of the proposal that Trump is promoting. In reducing the federal tax rate for both individuals and corporations, there will be more money for taxpayers to spend to improve the economy and expand GDP. As President John Kennedy points out above, even though the rates are lower, the absolute dollars to the treasury would be greater.

Once the stock market realized that President-elect Donald Trump might actually win, they realized that a higher GDP would be better for corporate profits, and therefore a positive for the stock market. Almost simultaneously, there was a significant increase in interest rates and a rotation from bonds into stocks has already begun. With interest rates moving up above 2.2% on the 10-year Treasury, it is the highest rate so far in 2016. A higher GDP growth is most assuredly going to lead to higher inflation in the coming years and correspondingly higher interest rates. These higher interest rates should be great for the savers in CDs and money market accounts, but not for those investors holding bonds. Do we know this will actually happen? Of course not!

So, the most important part to watch during this new administration will be what exactly they are able to get through Congress and make effective over the short term. One of the benefits that Trump will have that has not been available since 2008 is a Congress comprised of only his own party. Now that the Republicans control the House, Senate and the White House, while still difficult, there is a high likelihood that many of the proposals that he made during the campaign will become law. Almost unquestionably, there will be a reduction in income tax rates for both individuals and corporations.

Using history as our guide, lower income tax rates will lead to higher GDP and profits, which will benefit equities. In addition, the President-elect has indicated he would be tougher on interest rates so we will likely see interest rates go up in the coming years. As interest rates increase, bonds move lower and the money escaping from bonds most likely will find its way to equities, giving them an added boost. We should also expect to see higher inflation in the coming years, which will benefit people holding real assets. Real assets include real estate, gold and other things you can drop on the floor that could hurt your feet. Higher inflation necessitates higher interest rates and again all of these are detrimental to bond investors.

The President-elect has also proposed massive infrastructure projects. These include building roads, highways, airports, etc. But just as President Obama found out in 2009, this is a lot simpler to propose than to implement. As we now know, these shovel-ready projects took years to implement and had little or no effect on the economy. As Gary Shilling said, “They haven’t even made the shovels yet, and they no doubt would be made in China!” It will take years.

The effect of all of these acts will almost assuredly increase Federal deficits, which will be a drag on future generations, but lower tax rates will be enough to offset the lack of revenue to the government with more people paying tax even at a lower rate. So, there is much to be seen as it affects the U.S. economy. Already, the effects overseas have been noted. The emerging market funds have lost roughly 6% only in the three trading days since Donald Trump was elected. Mexico, particularly, has been hit hard with the peso down 9% and the indexes representing Mexican companies now down 12% since the election. Of course, Asia, which was a perceived enemy of the President-elect, is also down dramatically, but the economics of the Asian economy will probably be more influential than the actions of any president. Currently, the Asian markets are 15% lower than their traditional averages and their earnings are higher. The emerging market companies are the cheapest index in the world, but are currently being pounded by the rhetoric of a president who has not even taken office.

I am not surprised that the equity markets have gone up since the election that was predicted by almost no one. If you believe that a new president can get his proposed legislation through, then it would be the natural assumption that equities must move higher along with GDP and correspondingly inflation. All of these are factors that lead to higher stock prices. Given the totally unexpected victory of President-elect Donald Trump, you would expect to see traders try to exploit areas of the market that they think would benefit from future legislation.

As always, traders tend to trade first and think second. Whatever happens in the legislation will be a slow process, even with the majority of Congress being controlled by the same party. Any income tax decreases are likely not to be effective until later years, certainly unlikely in 2017. As we know, shovel-ready projects tend to drag out for months if not years. Therefore, all of the changes that are being proposed are likely to not be as dramatic or as rapid as we might believe, and your temptation to trade on these possibilities will likely be time-challenged.

It is, therefore, my opinion that the best approach to investing, even with our new President-elect, is to be diversified along a broad range of investments that give you exposure to various asset classes. I fully expect that the international markets will recover shortly since they are too important to us to continue to drift down. Frankly I would be shocked if the President-elect is successful in proposing tariffs to foreign countries to import into the United States. While he has promised to improve the job possibilities in the United States by bringing manufacturing back from overseas, it will be a slow process and certainly not something that will happen over the short-term. Further, while it benefits all citizens to create more jobs in the United States by transferring manufacturing back here, it is a detriment to consumers who currently buy products built overseas but sold in the U.S. at a lower price.

Therefore, there is financial hope that we will enjoy a higher GDP going forward, but at this point, it is just a hope. A higher GDP will create a lot more jobs than tariffs that interfere with worldwide commerce. I think we will see a dramatic difference between the candidate Trump and the President Trump. Once he is in office and finds the obstacles of implementing legislation that is being proposed, a good deal of the current assumptions will be tempered by negotiation and time. Given the unknowns and the time necessary to implement proposed actions, I do not recommend any significant changes in any portfolios based upon these facts at this time.

We invest in companies and mutual funds that we believe have great long-term prospects. Nothing that happens over the next 30, 60 or even 120 days will have a dramatic long-term effect on these companies. Clearly, short-term traders try to benefit from these changes in economic circumstances and political change, but remember they are traders, not investors. As investors, the best course of action is to be consistent, diversified and conscientious of what is happening around you. Nothing I know today or have read in the hundreds of articles on the subject indicate anything other than to stay the course with your investment philosophy, but yet be aware of what is actually happening and hope that we all benefit from whatever actions are taken.

If our own history is a guide, the era of the 1980s-1990s is a good example. While deficits soared under Reagan’s reduced income tax rates, they led to much higher GDP, higher growth and in the end, higher revenues to the government. President Clinton was the benefactor of that increase in revenues to the government. By actions taken by him in Congress, we actually had surplus revenues during the 1990s. As compared to the last eight years of increasing taxes, I am optimistic that trying something different might be the answer to the deficit issue. Higher taxes have not even come close to reducing the deficit – so far.

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

Best Regards,
Joe Rollins