Saturday, July 31, 2010

July Performance – Now THAT’S What I’m Talking About!

From the Desk of Joe Rollins

Notwithstanding all the gloom and doom being reported by the media these days, for investors, July was an excellent month (with only one more trading day to go this month). As you know, investors suffered a serious decline in June, but thankfully, the market rebounded in surplus of those losses during July. Through July 29, 2010, the S&P Index of 500 Stocks is virtually flat for 2010. Given that the S&P was down 6.7% at June 30th, the gain of almost 7% over the last month has been nothing short of extraordinary.

This morning, the Commerce Department reported that the GDP for the quarter ending June 30, 2010 was at 2.4%. While this certainly can’t be considered a robust number, it’s not abysmal, either. You may recall that the Federal Reserve has a target GDP growth rate of 2.5%, so this very nearly falls within that range. As such, even though the economy is growing, it is doing so at a low level. At this level, it’s unlikely that the increase in employment will be anything other than normal over the next 12 months, and certainly not high enough to absorb the current unemployment rate of 9.5%.

Most interesting about the Commerce Department’s report is that they revised the first quarter of 2010 GDP report from 2.7% all the way up to 3.7%, an almost unbelievable 40% increase. GDP reports are given in two preliminary announcements of the number for the preceding quarter. The final number was announced last month at 2.7%. It is highly unusual for the government to later change those GDP announcements after the final GDP number is announced. Accordingly, this morning’s announcement of a 40% increase for the first quarter GDP was atypical. It just goes to show that government bureaucrats do almost nothing well. Do you realize how many business and economic decisions are based on GDP numbers? Here our government missed it by a cool 40% last quarter. Once again, I ask the theoretical question: “Do you really want a bunch of bureaucrats in Washington controlling your health care plan?” I guess we will know soon.

Interest rates are returning almost nothing at the current time. If you’ve not looked at your money market account recently, you will be surprised to learn that it probably pays less than 1% annualized. I noticed yesterday that the money market accounts at Charles Schwab are returning virtually zero on an annualized basis. Even a 10-year Treasury bond today is paying 2.9% annually. Interest rates have never been this low for such an extended period of time. Therefore, investing in fixed-rate instruments is a losing proposition to inflation and nothing competes with the potential investment returns for equity and bond investments.

Corporate America will realize in the third quarter of 2010 its highest corporate profits ever! The amount of cash on corporate balance sheets is at the highest level ever recorded in U.S. finance -- $1.8 trillion in cash. All of these robust profits and massive accumulations of assets probably means higher stock prices in the future. If you haven’t invested in your future, now is an excellent time to do so.

Mortgage rates hit an all-time record low of 4.54% this week. Just think about it: you can now obtain a 30-year mortgage and tie-up a fixed rate at roughly 4.5% for 30 years. What an amazing deal for potential homeowners! If you haven’t refinanced, don’t wait any longer. These rates won’t last long.

Ironically, every single month Freddie Mac, Fannie Mae and the FHA in aggregate lose approximately $30 billion. Additionally, these government subsidized agencies are cutting out the banks from making loans. At the current time, few banks are willing to extend home mortgages because the rates are so low they feel they are only guaranteed to lose money. Therefore, the taxpayers (meaning me and you) are subsidizing governmental agencies that are loaning money at record low interest rates to the tune of $30 billion, but that is preventing the private banks from making loans. If you’re not confused yet, you can bet you will be soon!

Even though are government finances are currently being poorly managed by an inept and highly disliked Congress, there was much good news in the GDP regarding management of money by U.S. businesses. During the quarter ended June 30, 2010, business investments grew at a stunning 17%. For the first time in over two years, businesses are now investing in corporate technology, land and buildings to expand their businesses. Given their high levels of cash, it’s been easy for them to make this commitment to new capital investments. Some of the technology will surely be used to increase productivity of existing businesses, which is without question the first step towards expanding employment and hiring more people to service demand.

As I’ve pointed out on numerous occasions, it is corporate profits that lead to higher stock prices. Profits have never been higher and are continuing to grow. Almost assuredly the higher profits and increase in employment will lead to a better business environment over the next 18 months. If any theory regarding stock market valuation is true, then this should lead to higher stock prices in the coming years.

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

Thursday, July 29, 2010

Congratulations, Joshua!

From the Desk of Joe Rollins

It is with great pride that I congratulate my son, Joshua, on his recent victory in the Ansley Country Club Junior Championship. He scored a 77 in his final round, which far outpaced the other competitors in the tournament. In fact, the 2nd place competitor was 22 strokes behind Joshua!



I have talked about Josh in my blogs over the years. It’s hard for me to believe he is no longer a little boy, but I am reminded of that reality every time I stand next to him. Josh is nearly as tall as me (6’4”) and he is only 15-years old. I presume he’ll be even taller than me by the time he starts college.


Several years ago now, Josh showed interest in the game of golf. He always showed some talent in the sport, but I have noticed that he’s made great progress over the past few years since dedicating himself to the game. He is playing in the Atlanta Junior Grand Championship at Callaway Gardens this week, opening with a quite spectacular 77 on the par 72 (only 5 over par), 7,200-yard, Mountain View Course. The second day of the tournament wasn’t as good for Josh (his score was 88), but he is still gaining valuable experience that will serve him well in his future junior championship tournament competitions.


Needless to say, I am very proud of Josh. Whether or not he goes on to play any other sports the rest of his academic career is not as important as the fact that he wanted to improve his golf game and has demonstratively done so. Well done, Son!


Sunday, July 18, 2010

A Well Deserved Congratulations

Through the years, Rollins & Associates and Rollins Financial have had many employees, and last week, we were able to celebrate a special anniversary for one employee that was a long time coming - Ms. MiaRose Musciano's 25th anniversary with our firm.


In honor of the occasion, Joe surprised Mia with a lunch party at Ansley Golf Club that included Mia's parents and children along with some very thoughtful gifts. The most notable gift happened to be a framed autographed picture of Joe... It was quite funny moment.

In all seriousness though, congratulations to Mia and thank you for all that you have done.


Thursday, July 1, 2010

Second Quarter Review

From the Desk of Joe Rollins

Nearly every day, I find myself reading the most negative and contradictory financial information that I have seen in a long time. It’s hard to reconcile the fact that the economy is actually in fairly good shape with the proclamations of the dire financial consequences we will soon suffer that I read and see on TV. While it’s true that unemployment is still high, it’s important to note that the economy has turned positive. Furthermore, there’s little doubt that the rest of 2010 will be economically positive. In spite of that, I hear all over the news that the country is falling into a double-dip recession. Wrong!

There’s no question that things could have done better financially over the last three or four years. However, the fact that we survived the tremendous credit scare just goes to illustrate how resilient and adaptable the U.S. economy is. While unemployment increased and many people suffered the negative effects of unemployment, the damage to the overall economy was fairly well held in check. There will be additional months of hard times for Americans, but I think unequivocally it could be pronounced that the worst is in the past. Yes, unemployment is at 10%, but maybe we should focus on the 90% employed.

Unfortunately, the financial results for the equity markets for the second quarter were discouraging. However, after an almost 80% increase in the S&P 500 from March 9, 2009 through March 31, 2010, it’s not unexpected to have a pull-back of some kind. While the correction has not been fun, it has only been shallow and controllable. For the six months ended June 30, 2010, the Dow Jones Industrial Average has a total return of -5%, the S&P Index of 500 Stocks has returned -6.7%, and the NASDAQ Composite has returned -6.6%. While these certainly are not robust returns, they can’t be classified as devastating, either. The major market indices were down 4% in the last two trading days of the quarter – this definitely isn’t the move of investors; it’s the speculators. The composite return of the Rollins Financial managed accounts is down -2.88%. That loss is only half of what the major market indices have suffered.

It’s important to put the year-to-date numbers in perspective, given the enormous increase in the equity markets last year. Even though the major market indices are down single digits for the first six months of this year, if you look at the one-year return on these same indices, things do not appear to be as negative. The Dow is up 19% for the one-year period ended June 30, 2010; the S&P is up 14.4%, and; the NASDAQ is up 16.1%. As you can see, these one-year returns are quite robust. All too often we focus on daily, weekly and even quarterly returns when we should be more focused on the long-term. Even though the major market indices are down for the year, they are only down a small amount, and those losses could effectively be reversed in a trading period as short as one month.

During the second quarter of 2010, we were bombarded with the negative news out of Europe and the ongoing battle between governments needing to balance their budget, yet their desire is to stimulate the economy. Recently, the G20 met in Canada and decided to reduce their respective countries’ deficits by 50% over the next three years. This goal is definitely honorable, but it’ll be virtually impossible to reach. Only Great Britain is taking the most difficult steps of dramatically cutting their federal budget and also raising taxes even though their economy is in recession. Unfortunately, the United States is not following their lead – although we are increasing taxes dramatically (which is very, very wrong); we have not taken any steps whatsoever to reduce federal spending.

What’s even more interesting about this recent downturn in the stock market is that it is based in a time when corporate earnings are just exploding to the upside. In fact, by every reasonable measurement, the U.S. stock market is as cheap as it’s been in a long time. Corporate cash on the balance sheets of major corporations is at an historic high, and corporate earnings are likely to set an all-time record during the third quarter of 2010. Isn’t it ironic that at a time when corporate balance sheets are in their best condition ever and corporate earnings are at their highest level in our financial history, stock market pessimism is overwhelming?

I couldn’t help but be bewildered this morning when I saw former Georgia governor Roy Barnes’ campaign commercial. As most of you know, he is running in the 2010 race for Georgia governor. In my opinion, Barnes is a classic “tax and spend” Democrat who doesn’t seem to understand the economics of running a government. That is why he was voted out of office the first time!

Two different commercials for Barnes were aired within two hours. The first was blatantly aimed at acquiring the votes of the teachers unions by guaranteeing that educator salaries would increase. He stated that the quality of education would increase by increasing teacher salaries. Maybe over the long-term that would be true to attract better educators, but over the short-term, it only pays the same teachers in the system more money. I question whether the 4% to 5% increase in compensation would serve to attract new and better teachers to the profession, but it will almost assuredly get votes from the very strong and important teachers union. The real question is who will pay for these higher salaries? You may rest assured it will be our tax dollars.

Perhaps someone should explain to politicians that giving government employees a raise does not make the economy better. If you give one group a raise by taking money from another group through higher taxes, then isn’t that a net zero? Duh!

The second commercial indicated that Barnes would immediately place 10,000 contractors to work renovating the buildings owned by the State of Georgia. While that’s a desirable act, it doesn’t explain where the money will come from to accomplish that project. It seems that politicians just cannot keep from spending your tax dollars.

I don’t need to write a long dissertation on why the first stimulus bill of the Obama administration failed since now even they concede that fact. They certainly wouldn’t be asking for more stimulus money if the first stimulus act had been successful. There are many reasons for its failure, but it only seems that they want to continue repeating those mistakes.

First and most importantly, the majority of the stimulus bill still hasn’t been spent. Even though we were looking for shovel ready projects, here we are almost a year and a half later and that money has failed to be spent. That’s your government in action. Hopefully once this money finally filters out from Washington over the next six months, it will help employment.

The part of the stimulus act that continues to baffle economists is the money that the federal government spent to subsidize poorly run state budgets. In fact, the new stimulus act recommended by the President proposes even more to state governments. Transferring the federal deficit to cover state deficits hardly provides any economic stimulus. Yes, it’s perfectly possible that some teachers and firemen would have their employment extended, but it’s only temporary. Since almost all states are required to balance their budgets annually, it is impossible to create long-term employment when the government subsidizes deficit in one or two years. We can only hope that Congress will finally adopt common sense and not approve a new stimulus bill. In fact, the U.S. economy would be much better off if the federal government got out of the economy’s way and just let it grow with its own momentum.

Many of my clients have expressed outrage with the federal deficits and congress’s complete inability to deal with those deficits. I agree, but unfortunately it seems like congress is only increasing those deficits instead of dealing with them. These deficits will have very negative, long-term financial consequences for this country. They must be dealt with reasonably and efficiently by our government, but to this point, our government has given no indication that they have the capacity or will to do so.

As bad as that financial condition is, quite frankly, it isn’t something that needs to be dealt with today. If any reasonable politician would come out with a plan to reduce the federal deficits and get back to a balanced budget over the next five to ten years, the equity markets would stabilize and confidence would be reestablished. The federal deficits do not need to be reversed in one year, but a plan must be established. Unfortunately, no one in Washington has any such plan at the current time. In fact, it appears that there plan accomplishes quite the opposite – to continue to spend excessive amounts of money with increased taxes and little hope of balancing the budget.

While the negativism of running the federal budget in Washington is a negative for the equity markets, the effect would be felt three or four years out rather than today. Let’s reserve judgment on that economic event until after the mid-term elections, when it is highly likely that a significant number of congress members will be replaced.

I find it almost hysterical when certain members of congress praise their recently passed financial reforms. First, it wasn’t Wall Street that created the financial crisis. It’s amazing to me how often politicians misstate facts to support their own objectives. As I’ve said in the past, every time I hear someone say the words “bail out,” I am outraged when I review the facts and see that Wall Street repaid all of the money loaned to them under the TARP with a significant profit to the federal government, but the car companies and AIG have not even tried. This wasn’t a bail out of Wall Street – but there was a bail out of companies for political reasons. The real cause of the financial meltdown in America in 2007 and 2008 was Freddie Mac and Fannie Mae. Interestingly, this financial reform doesn’t even address them and does nothing whatsoever to limit their incredible damage to the economy. The following chart explains why!



Much like the health care bill, we will soon find out that the financial reforms only add thousands of new federal employees. It will be a gigantic bureaucracy that will essentially make small banks a thing of the past. No small financial institution will ever be able to keep up with the gigantic bureaucratic compliance obligations of this new bill. There are no protections for consumers, and almost everyone’s cost to use bank facilities will increase. Your checking account costs will skyrocket, availability of credit on credit cards will be dramatically reduced, and the availability of credit to small businesses will be slashed. Financial reform? What a joke!

One bright aspect of the quarter was that the return on bonds was positive. Bonds have actually had a great six-month period, but I cannot help but think we are entering the bubble territory for bonds. It’s always good to have bonds in every portfolio since they tend to balance the portfolio and add some income aspects to it. However, it’s important to note that the 10-year Treasury bond is presently at 2.94%, which is trading at one of the lowest levels in our financial history. It is hard to imagine given the extraordinary spending required by our government to finance the federal deficits that just keep getting higher and higher that interest rates will stay low for very long. Therefore, I consider investing in bonds almost as risky as any investment class available today. It is perfectly okay to own a reasonable allocation of bonds, but an overweighting in this asset class could wind up being financially detrimental.

It may seem that I am relaying only the negative news as reported by the financial media, there are positive points that you cannot ignore:

  • Interest rates are at historic lows
  • Corporate earnings are high and getting higher
  • Corporate balance sheets are in the best condition in years
  • Price/Earnings ratio is trading at an almost historic low to future earnings
  • CD’s and fixed-rate instruments are providing virtually no returns
  • European governments are now moving toward austerity and the IMF has brought a safety net to the financial security of these countries
  • GDP is positive and likely to continue being positive for the next two years
  • Unemployment is still high, but it is getting lower every month
There is an incredible amount of good news, as illustrated above. In fact, there is more than enough good news to positively impact the financial markets for the rest of the year. Therefore, it is time for me to make some predictions based upon solid information rather than on speculation and the extreme positions maintained by the financial media:
  1. The second half of 2010 will bring an excellent equity market. This will bring the equity markets to a higher level at the end of the year than where they are today and will be nicely positive for 2010.
  2. Interest rates will increase regardless of what happens in the economy. Basic supply and demand for government bonds will force interest rates up since the supply of bonds will so overwhelm the demand. If that is the case, then bonds will be a bad asset class in which to be invested for the rest of 2010.
  3. Interest rates on CD’s will continue to be low for a few years. The banks have a high desire to make profits. One way for them to do that is by not paying high interest rates on CD’s. As such, CD’s and money market accounts will not be a viable alternative to equity investments.
  4. Unemployment will continue to be high and I doubt very seriously whether it will be much lower over the next two years. By the end of 2011, I anticipate an unemployment rate of approximately 8%. I see no reason why businesses will increase employment over the next two years given the avalanche of anti-business legislation out of Washington.
Given my predictions above, it seems like it’s a great time to be invested regardless of what you see on TV day-in and day-out. If you are currently not invested or are under-invested, now is a great time for you to increase your investments or make your IRA contributions for the current year. I really look forward to reviewing my predictions in January of 2011 to see if I’m correct.

As always, the foregoing comments are my opinions, thoughts and personal biases. In all cases, I could be wrong.