Tuesday, June 7, 2016

"Ali and Me."

From the Desk of Joe Rollins

Since there is not a whole lot going on in the investment and equity markets at the current time and not a lot of news to report, I thought I would reflect on the passing of the great Muhammad Ali, who unfortunately died over the weekend. While I did not know him personally, I did meet him on a couple of occasions and I thought that I would share those reflections after giving you a run down on the financial news for the month of May.

The month of May was very satisfactory, for the equity markets have now come full cycle from the 10% decline that we saw in January through mid-February 2016. For the month of May, the S&P 500 index was up 1.8%, and for the one-year period has a 1.7% total return. The NASDAQ composite average increased 3.7% in May, yet reflects a -1.2% for the one-year period. The Dow Jones industrial average was only up 0.3% for the month of May and reflects a gain of 1.2% one-year total return. The Barclays aggregate bond index was down 0.1% during the month of May, but leads all major indexes by being up 2.9% for the one-year period.

I would be remiss if I did not point out the more long-term returns on these indexes. Once again, it is an attempt to show that short-term results are not meaningful when you invest in equities. As an example, the S&P 500 index is up annually on the five-year period 11.7% and the 10-year return is 7.4% annually. The NASDAQ composite is up 13.1% and 9.7% annually for the five-year and 10-year periods, respectively. The Dow Jones industrial average is up 9.9% for the five-year return and 7.5% for 10- year period. As you would expect, the Barclays aggregate bond index is the laggard of reporting indexes. For the five-year period, this index is up 3.2% and for the 10-year, 4.6%. As is almost always the case, the equity markets outperform the bond index over longer periods of time. The bond index protects you from short-term volatility, but if you are truly interested in long-term performance, you almost universally have to be in equity indexes.

What is interesting about this year is that for the one-year period, the S&P 500 index is the best performing index as compared to broad-based mutual funds. While the S&P index is up 1.7% for the one-year period (all earned in May), virtually all mutual funds of every description are reporting a loss over the one-year period. While you probably have seen this happen in the past where a passive index outperforms active management, it is usually only a short-term phenomenon that turns around as the equities begin outperforming once again. I fully anticipate that the actively managed mutual funds will well outperform the S&P 500 index over the next 5-year and 10-year cycles.

While it does not seem that long ago, we are surprisingly coming up on the 20th anniversary of the 1996 Olympic Games here in Atlanta. I took advantage of every opportunity that came my way while the Olympics were being held here and had many wonderful experiences. While those who were at Centennial Olympic Park during the explosion may not have as fond of memories, we fortunately had left about a half-hour early. In fact, we did not even know the explosion took place until we saw it on television the next morning.

As you know, Olympic Stadium later became Turner Field. It is hard to believe that only 20 years later, the Braves are abandoning Turner Field, which was brand new in 1997. I had many opportunities to buy tickets to the opening ceremonies at the Olympic Stadium so I traded tickets around in order to improve my seats in order to see the historic opening ceremony. I eventually ended up with seats in the 10th row, right at midfield. It is hard to imagine that even 20 years ago, I paid close to $800 per ticket just to be that close. We did not get home until 3:00 AM due to security getting out of the stadium.

Security that night was overwhelming. The event did not start until 8:00 PM, but you were required to be in the stadium in your seats by 6:00 PM. Since it was a hot and humid night and beer was being sold plentifully throughout the stadium, the crowd became anxious as the opening ceremony began. Amazingly, we were sitting among a great number of celebrities.

To our left, Demi Moore and Bruce Willis were sitting with their daughters, Scout and Rumer. At that time, Scout was five and Rumer was eight. What was particularly memorable was that Demi Moore had her head shaved since she was in the process of filming G.I. Jane, which required no hair. It is hard to believe that recently we saw Scout walking topless down the streets of New York City in a protest of some kind. My how time flies….

Down the same row where we were sitting was Roy Firestone, along with his young son. I am sure many people do not remember Roy Firestone, but at the time, he was the biggest name on ESPN and was by far the most famous sports commentator of the time. Unfortunately I did not get a chance to speak to him, as the only time we were within talking distance was in the men’s room.

Directly in front of us was Greg Louganis, who by far was the most famous U.S. Olympian of the time. As I am sure you are aware, he won the gold medal for diving in the 1984 and 1988 Olympics. At that time, he had not officially come out as being openly gay however, there were rumors to support that cause. Needless to say, we were happily sitting among the celebrities in anticipation of the opening ceremony.

Demi Moore and Bruce Willis

Greg Louganis

I have to admit, it may be the most impressive show I have ever seen in real life. It could have been just a reflection of the excitement and the energy in the stadium, but I was absolutely flabbergasted at how moving and well-coordinated the show actually was. But without question, the highlight of the evening was when the Olympic torch entered the stadium. It was an unusual presentation in which no one knew exactly who would light the Olympic cauldron. I remember seeing numerous people carry the torch around the track, but the most recognizable was Evander Holyfield due to his size.

Directly in front of us, the torch was passed to Janet Evans (an Olympic swimmer) who ran it up the side of the stadium to light the cauldron. Right at the last second, Muhammad Ali stepped from behind the curtains to accept the torch from Janet. It was noticeably visible that he was shaking and the torch appeared to be heavier than his weak arms could handle. At this time, he was already suffering from severe Parkinson’s disease, and it looked like he was not going to be able to raise it to put the fire to the Olympic torch, but thankfully he did. Later, it was learned that he had a special torch that would not go out in case he did in fact drop it. It was one of the most moving and inspirational of events I have ever attended. But that was not my last encounter with Muhammad Ali.

I was fortunate to be good friends with the president of the Super Bowl Host Committee that came to Atlanta in the year 2000. Robert Dale Morgan had been a long-time friend and was privileged to be appointed chief executive. He later moved on to Houston to be their Super Bowl Host Committee president, but unfortunately died prematurely a few years ago. Anyway, Robert Dale Morgan got me tickets that year to a special presentation at the Fox Theater where Elton John performed, as he was a special guest of the Super Bowl in 2000.

As we were filing into the auditorium, I came upon Muhammad Ali and his entourage. Despite visibly quivering, he was cordial and stopped to shake hands. As he came closer to me, I was somewhat flabbergasted to note that he was considerably smaller than I was and had lost much of his muscle tone by that time. That came as a major surprise, given his legendary boxing status.

A few days later, Robert Dale arranged for me to see Muhammad Ali in order to get him to sign the picture that I had obtained from the Atlanta Olympics four years earlier. Although there were 40 or 50 people in the room and it was difficult to understand him as he spoke, he was very amiable. I clutched a hundred dollar bill in my hand with the anticipation that I would pay him for signing my picture. As I offered it, he waved it off as not necessary.

I will never forget getting close to him as he signed the picture reflected below. He literally stood up and braced his right hand with his left arm and entire body to keep his hand as steady as possible. His manager said that he had to sign small since his hand could not move very far as it was braced. It was quite amazing to be in his presence, and it is hard to believe that he is no longer with us.

And now back to the financial markets. Everyone is well aware that the year 2016 began in a very negative fashion. At one time during February, the S&P 500 index was down almost 10%. At that time, all of the critics and “the world is ending” chorus was espousing that the markets would go down 70% or 80%. I actually never quite understood what they were going to use as a catalyst for this major decline. However, interestingly but not surprisingly, at the end of the day they were all selling gold and silver.

In mid-February 2016, the markets turned on a dime and started to rally. There was a noticeable increase over the next several months, leading to the S&P 500 index up 3.6% year-to-date, through the end of May. The three-month total return on this index has been 9.1%, which shows you how far down the markets were prior to rallying.

If the gain of 3.6% for the period through May was annualized this return would be 8.6%, which is well in line with my projection for 2016. However, the people that believe in a 2016 stock market crash will not let up; every day you see the stunning proposals and all the financial press of the major market meltdown that is coming. Interesting to note that as of May 31st, the S&P 500 sits only 1.9% below its all-time high. Pretty impressive considering the market has basically gone nowhere over the past 12 months.

I often sit back and contemplate why people feel so strongly about trying to forecast a market crash. Perhaps due to my age I have seen so many of them along with a quick rebound that it is hard for me to get terribly concerned about a short-term selloff.

My first connection to a stock market crash occurred in 1987. Who could forget the famous crash in 1987 on the day that the Dow Jones industrial average began at 2,247 and closed at 1,739, a 22.61% decline in one day? As many of you know, that decline was devastating to investors at that time and was clearly the largest one-day fall of all time on a percentage basis. While we went through severe market declines in 2000-2001 and 2007-2008, nothing compares to the one day market decline in 1987.

I reflect back on that crash with an interesting perspective. At the end of that terrible day, the Dow Jones industrial average was at 1,739. At the end of May 2016, the Dow Jones industrial average was at 17,787, a 1,000% increase at 8.5% annually. Therefore, the market has gone up 10 times the level of the 1987 decline. In fact, after each so-called market crash, the market has come back stronger than before. And as we sit here today, we are enjoying an almost all-time high.

Therefore, these projections of a major market crash are based upon evidence that is not apparent to me in reading the financial pages. While it is true that the GDP for the first quarter was a tempered 0.8%, that is really not too bad for a January through March quarter. The Atlanta Federal Reserve is now projecting that the second quarter, which we are currently in, would have a nice rebound of 2.9%. That is a constantly moving and updated index, and as history has reflected, it has been fairly accurate. More interestingly, they are projecting that the third and fourth quarter GDPs might even be higher than the second quarter GDP. I would like to remind you again that there have not been any major market declines without a corresponding recessionary period. Therefore, no recession is even remotely in the horizon with the information we have today.

In fact, economic news has recently been pretty good. Existing home sales were up 6% in May and up an astonishing 22% in new home sales. All of my residential real estate friends comment on the fact that there is just a shortage of inventory of houses to sell. It is a seller’s market with buyers wanting to purchase but no homes are available for sale. What more evidence could you need to prove a strong real estate market?

Retail sales have been strong at 1.3% in May, the largest increase in over a year. Durable goods were up 3.4%, the largest increase in six months. While the economy is clearly tempered, the economic news continues to be good.

The most recent job report for the month of May was clearly a negative with an increase of only 38,000 new jobs. However, it is hard to get terribly concerned about that when you review the employment numbers, as I often do. Over the last 12 months, there are close to 3 million new people working in America and the unemployment rate has fallen to an astonishing 4.7%. It makes zero sense to me that all of these new people are working and the unemployment number has dropped below what is considered the full employment rate in America, yet so many people are forecasting a severe recession?

I drove up Roswell Road, in my home city of Atlanta, and without even looking saw three “help wanted” signs at various small businesses. Yes, I recognize that these are low-paying retail jobs, but they are still jobs. Employers are looking for workers that they cannot find. That just does not happen during a recession.

I guess I need to remind you of how bleak it can be in a major market downturn. Yes, the jobs report was weak in 38,000 employees hired, but during 2008, it was not uncommon to see this same government report reflect employment losses of close to 600,000 per month. But one of the positive attributes of a poor employment report is that it likely keeps the Federal Reserve on hold, and therefore no major increase in interest rates for now.

Many people ask me my opinion regarding future interest rates. Interest rates are going up; it is just a matter of when. There is almost zero chance that interest rates will fall dramatically over the next couple of years. Therefore, if you are satisfied with a 10-year treasury rate of 1.8% with no appreciation in value, then bonds represent a good mix. I do have to remind you though that the S&P 500 index has a yield in dividends of close to 2.3%.

Lastly, I cannot help but reflect on the negative sentiment that seems to be reflected in the investment markets. The recent AAII summary of individual investors finally reflected that 17.8% of them were bullish. This is only the third time in the 29-year history of this survey that it has fallen below 20%. It is also the lowest rating in over 16 years. As reflected in the most recent Fidelity Monitor and Insight, when this index gets this low, the market tends to have a 10.6% gain over the next six months. Basically, the reason for this phenomenon is that when people are the most negative, they are the least invested. With so few people invested, it would not take a major buying spree to greatly improve the returns in the financial markets.

When people express the opinion that the market is going down by large sums, I ask them why they feel that way. Almost universally, the answer comes back that they get that feeling because of the negative tone of the media. I assert that whatever the media says is tainted by whatever political feeling they have on any given day. As I so often comment in these postings, you have to evaluate earnings, interest rate and the economy. Even though earnings were somewhat down in the first quarter of 2016, they are projected to be higher for the rest of the year. And while the economy was also low in the first quarter of 2016, it is forecasted to be higher for the rest of the year. And as mentioned above, there is almost no chance that interest rates will increase dramatically during 2016.

Therefore, it is a slam dunk that all the important economic indicators are at least neutral or positive. It is therefore highly unlikely that we will see a major decline in equity balances that will not be followed by major reversal. Since we are investors, not speculators or traders, I see no reason to change our investment philosophy at the current time. The market may be volatile now and may go down for the short-term, but long-term the trend is clearly up.

In closing, I will once again quote Muhammad Ali, “Silence is golden when you cannot think of a good answer.” I cannot think of a good answer why I should write more, and therefore I will be silent.

Various memorabilia from our offices of Muhammad Ali

The Phantom Punch vs. Sonny Liston, II - Signed AKA Cassius Clay

Muhammad Ali and The Beatles (At the time of this picture, he was much more famous!)

Muhammad Ali AKA Cassius Clay - Age 12

World Champ

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

Best Regards,
Joe Rollins

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