Thursday, June 22, 2017

Georgia Qualified Education Expense Tax Credit

In 2008, the Georgia General Assembly passed the Qualified Education Expense (QEE) Tax Credit bill and it was signed into law by then Governor Perdue. This law provides for the creation of student scholarship organizations (SSOs) to which Georgia individuals and corporate taxpayers can contribute in exchange for a state income tax credit and potential federal charitable income tax deduction. Please do not confuse this with your child’s tuition if they attend one of the participating schools – taking advantage of this donation tax benefit will not help reduce their tuition. What this does mean is that you can potentially offset your Georgia tax liability dollar for dollar for making a charitable contribution to a participating school, for which you will also receive a federal charitable donation deduction. That sounds like a win-win-win to most of us. There are some key items to note, discussed below, but overall, this program is increasingly popular for a reason.


To get started, you must submit a tax credit application to the qualified Georgia SSO of your choice. And the time to do that is now. Two of the more popular SSOs, The Georgia Goal Scholarship Program, and Grace Scholars began and will begin accepting applications on June 1 and July 1, respectively. You can apply anytime from the SSO’s opening day through December, 2017.

Collectively, all applications received during 2017 are then submitted by the SSO to the Department of Revenue (DOR) on January 1, 2018 at which point the DOR will dole out the tax credits. For 2017, there were $58 million dollars in credits that were used up on January 1st! So, it is imperative that you get your application in to your SSO before the end of the year. It used to be a first-come, first-served program, but in order to equalize the credit distribution, they consider all applications turned in on January 1st together. This means that you most likely will not be approved for your full contribution, but you should be approved for a portion of it.

By the end of next January, you should find out your approved amount and then you must make your payment within 60 days to validate your contribution. This allows you to take your charitable donation and Georgia credit for the 2018 tax year when you file your returns in 2019. Seems like the deduction and credit is a long way away from your submitting your application today but this program has been so popular, it is necessary to begin the process this far out. If you went through the process last year, or this year, then you most likely just utilized your 2016 credit and you will get to utilize your 2017 credit when you file your returns in early 2018 – around the same time you are making your 2018 donation.

If you are new to this game, or even if you are not and just need a refresher, there are some things to note:

  1. There are limitations on the amount that you can take as a tax credit. These are the limitations:
    • Single individual or head of household – up to $1,000
    • Married couple filing a joint return – up to $2,500
    • Married couple filing a separate return – up to $1,250
    • S corporation shareholder, LLC member, or partnership partner – up to $10,000
    • C corporation or Trust – up to 75% of annual Georgia income tax liability
    And like we mentioned above, these are the limits for which you can apply. Given the popularity of the program, you will likely only be approved for a portion of your application amounts. But something is better than nothing.
  2. You can specify which school you want to receive your donation from an approved list. The SSOs maintain a list of qualified schools from which you can choose. And the school may be able to tell you if they are participating and if so which organization to use.
  3. Keep in mind, that you are applying for an amount to offset your Georgia tax liability. If your contribution amount exceeds your Georgia income taxes, you can carry your credits over for up to 5 years.
  4. You are entitled to a federal charitable contribution for your donation. And for anyone that typically pays alternative minimum tax (AMT), charitable donations are one of the only itemized deductions that are fully allowable under the AMT calculation. You must adjust your Georgia charitable deductions so that you are not double dipping, but hey, you are getting a Georgia tax credit which is even better.
  5. If you pay Georgia estimated taxes or have Georgia withholding, you can most likely adjust those amounts to reflect any approved tax credit amount to cover the contribution cost.
Those are the basic details in a nutshell. There are definitely more complex issues that we would be happy to review with you on an individual basis. For example, if you are an owner of a pass-through entity and want to make sure that you can apply for the full $10,000, let us know. And by the way, if both spouses are members of pass-through entities generating substantial income, you can potentially apply for a $20,000 credit.

In our opinion, this is a great way to check the box for a charitable donation to assist with school scholarships while offsetting your potential Georgia income taxes. Please do not hesitate to contact us with additional questions or if this is something that could be beneficial for you. We look forward to hearing from you.

Best Regards,
Danielle Van Lear

Tuesday, June 6, 2017

Sell in May and Go Away - but where are you going to go?

From the Desk of Joe Rollins

Josh and Ava

Reid and Caroline,
Children of Robby Schultz, Partner of Rollins Financial,
and Danielle Van Lear, Partner of Rollins & Van Lear.


The saying above has been around since I started reading the Wall Street Journal in the 1970s. The presumption was that the best traders on Wall Street would sell in May and go to their Hampton resorts and sit out on trading for the summer. They would come back after Labor Day and get reinvested going into the end of the year. There were many that argued that the best months in the stock market were always November through May because this was when the active traders on Wall Street were around to cut deals in back rooms and invest in stocks.

Those days are long gone. Now, momentum trading occurs daily. Millions, if not billions, of shares are traded by machines that exploit pricing errors on stocks, and are thankful for a gain of a cent or two. In fact, the vast majority of all shares traded on all major exchanges are done by momentum traders, not human traders. I do not say that with criticism of these investors as I have studied and read books on the subject, and I can find no real harm that they cause. In fact, they even may provide a service. They move markets and stocks when there isn’t enough volume to do so. One thing is crystal clear. The old days of stock traders cutting deals in the back room to exploit the market for their own benefit and against small investors like you are as dead as the old proverbial buggy whip. That is a very good thing.

Once again, I have to report that the month of May was an extraordinarily good month for investing. The Standard and Poor’s Index of 500 stocks was up 1.4% for the month of May and up 8.7% for the five months ended May 2017. It is also up 17% for the one year period ended May 31, 2017. The NASDAQ Composite was up a banner 2.6% for May and is up 15.7% year-to-date. For the one year period, it is up a sterling 26.7%. The Dow Jones Industrial Average was up a meager 0.7% for the month of May, 7.5% year-to date and up a very strong 21.2% for the one year period then ended. Just for purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.7% for the month of May, 2.2% for the year-to-date and 1.4% for the one year period ended May 31, 2017.

To answer the title of this blog, I thought I would go through a few asset classes to see if I could solve the age-old question, “If you sold in May, where would you go?” What is interesting now is that the economy is starting to pick up and the anticipation of lower tax rates, capital improvements to our roads and bridges and the expatriation tax are all fueling the market higher, contradicting the so-called “experts” that you see daily on the financial news.

Let us briefly look at the other asset classes:

1. Cash – Over the last several months as bond rates have increased, the earnings that money market cash accounts earn has gone up. About this time last year, cash was earning virtually zero, but now it is up 0.8% annualized and roaring ahead to a 1% annualized yield. Just for comparison, I would point out that the S&P 500 Index made 1.4% for the month of May, nearly twice the current rate of cash on an annualized basis. However, most people that are holding large cash balances are not doing so in money market accounts. They do so in non-income producing checking accounts under the misguided presumption that you need an emergency fund. That may have been true in the days before lines of credit on your house, credit cards and other investment accounts were around to provide a safety blanket. Holding cash in a non-interest-bearing money market account at the current time has no economic benefit.

2. Residential Real Estate – I am always baffled by people who obtain wealth suddenly want to own real estate. It could be for a number of reasons for their wealth such as inheritance, sale of business, life insurance or other new-found wealth. The one thing they almost always purchase is more residential real estate. I never understood why a couple would need a 10,000 square-foot house in the $5 million range. First off, someone would have to clean that house, which would be expensive. Second, the number of people that can actually afford that house is virtually nil. However, that is the first thing that wealth seems to want. It actually goes back as far as Gerald O’Hara’s famous quote to Scarlett in Gone with the Wind, “Why, land is the only thing in the world worth working for, worth fighting for, worth dying for, because it’s the only thing that lasts.”

In any case, residential real estate is currently borderline bubble territory. There is very little available residential real estate to purchase, and what is available to purchase is extraordinarily high-priced. As with every residential real estate boom and bust that I have seen, just as prices reach high levels, contractors flood in to build homes to satisfy this desire. In my 40 years of living in Atlanta, I have seen many residential real estate booms and busts. Almost invariably at these levels, you see the supply of houses increase and the value of houses decrease. The law of supply and demand. I am not suggesting that it would happen overnight, or even in the next few years. But I do know when the price of houses gets so expensive that the average homebuyer cannot afford to purchase, you are at the very top of the market and there is likely to be a downward trend for years to come. So, we are today.

3. Bonds – Every day I talk to clients about investments and bonds. You will find countless textbooks that say you should be invested in bonds based on some hypothetical age – however, I beg to differ. The Federal Reserve has already announced that there will be at least three interest rate increases during 2017. Currently, interest rates continue to be at all-time lows with a current 10-year Treasury note at 2.16%. But we also know that the labor market is outstanding, the economy is growing significantly and that the Federal Reserve is moving interest rates higher. At the current time, the position in bonds is more likely than not to produce a negative or marginal rate of return in the upcoming year, as it has over the last one-year period.

4. Commercial Real Estate – Of all the asset classifications in the real estate arena, commercial (non-residential) real estate probably has the greatest potential. Rents are just now beginning to catch up with the economy and are likely to increase. Since the average investor cannot invest in commercial real estate except through other entities, I will not bother to discuss these in greater detail.

5. REITs, Hedge Funds and Oil Pipeline ETFs – REITs have had an incredible run over the last year, but that has ended. With rising interest rates and the beating that retail shopping centers are currently taking, it is not likely that REITs will have much of a return going forward. Hedge funds, by all standards, have been a tremendous bust. Even though I review the reported results of hedge funds on a daily basis, most do not even come close to the financial returns of the S&P 500. In my opinion, the oil industry is going to be slow-growing for years to come. The advancement of technology in oil has revolutionized the industry, and going forward, the demand for oil will be well below the supply produced by the companies that frack oil in America. There is a great amount being done with Hybrid cars. Increased mileage and no need for oil coupled with the oversupply of oil around the world, I suspect to see oil prices depressed at this level for at least a decade. I am not surprised at all that some of our friends in the Middle East are suffering from an economic meltdown. We knew it was going to happen at some point, but no one expected it would last this long. And now they too are suddenly cutting corners and pinching pennies. It could not have happened to a nicer group of investors.

As for the stock market moving forward, there is excellent potential. As the first quarter comes to an end, earnings for the first quarter on the S&P 500 were 14% higher than the same quarter last year. The much-respected Federal Reserve Bank of Atlanta is now predicting the GDP growth in the second quarter will be 3.4%. Didn’t I just hear on T.V. last week from almost a consensus of democratic congressmen that 3% growth was unattainable?

The unemployment report from last Friday was nothing short of spectacular. With an unemployment rate of 4.3%, almost all of America is now fully employed and when you have employment, you have consumer spending. Basically, the U.S. economy is at full-employment and throughout the U.S., employers are reporting the lack of qualified employees to fill positions. Of course, there are isolated pockets of unemployment, but in the good manufacturing markets, unemployment is down close to 3.5%. Something is going on in manufacturing that no one has forecasted and can only be good for the stock market.

You may remember that many forecasters said that Hillary Clinton was a “slam dunk” to win the election. I might have even said that myself. One of the things that they all agreed upon was that you could not stop illegal immigration in the United States. I guess the news that illegal immigration has slowed to a trickle into this country would be surprising. It is interesting to me that it was not necessary to build a wall, but to simply enforce the laws that currently exist.

The rest of the world is rushing to manufacture in the United States. There is a simple reason that the current administration continues to enforce fair trade rather than open trade. Over the next ten years, we will see an explosion of foreign manufacturers in the United States in order to avoid tariffs, making the manufacturing outside of the United States unprofitable. This is a great thing for the U.S. and for U.S. employment.

Therefore, the three important components of higher stock prices are clearly and unmistakably in place. Interest rates continue to be extraordinarily low and earnings appear to be excellent and getting much better. Most importantly, the economy is strong and getting stronger. Therefore, the trifecta of economic importance of higher earnings is firmly in place, and I expect the market to trend higher going to the end of the year.

Every day I meet with potential investors who state that they do not want to experience another year like 2008. Believe me; I would not want that either. However, if you look back at the economy in 2008, which was experiencing a financial meltdown, as compared to the economy today, how could you even contemplate that the stock market would perform at the same levels? Back then, the economy was fragile and breaking; today, it is strong and soaring. There is zero comparison between 2008 and 2017.

This morning, I heard someone on T.V. exclaim that it would be hard for the market to rise since there is such a high percentage of financial resources allocated to stocks. Actually, the exact opposite is true. In 1998, 60% of adults in the U.S. were invested in the stock market. In 2008, 65% of those adults were invested. Yet today, less than 54% of the U.S. population is invested in stocks. There is an avalanche of money, cash and resources that will come into this market over the next few years. This will create a backstop for any swift decline. While you will certainly see swings up and down as we move forward, I fully anticipate that over the next year markets will be higher than they are today. The one thing I am confident about is that if you have a 20-year period before you actually need the money, the markets will be significantly higher than they are today.

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

Best Regards,
Joe Rollins

Friday, May 26, 2017

Happy Memorial Day!

In observance of Memorial Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, May 29th. Please note that all major U.S. stock exchanges will also be closed in honor of those who died in service for our country.


Our office will re-open for business on Tuesday, May 30th at 8:30 a.m. If you require immediate assistance on Monday, please do not hesitate to contact our staff via email:

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

Please be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.


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