Wednesday, April 18, 2018

Closed for Tax Holiday!

Please note that Rollins & Van Lear and Rollins Financial will be closed on Friday, April 20th, 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 23rd 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
Robby Schultz at
Eddie Wilcox at

Thank you and have a great weekend!

Tuesday, March 6, 2018

Get on the Rollercoaster Now, This Stock Market is Going Higher!

From the Desk of Joe Rollins

I spent the last several weeks analyzing the cause and effect of economic events that occurred during the month of February and it is hard to pinpoint exactly what traders perceived as being negative. The economy continued to be very strong, earnings continued to go up, and interest rates, while higher, are still by any reasonable standard remarkably low.

Throughout this blog, I will try to give you the reasons why the market sold-off in February and why those reasons are misplaced. In addition, I will address the issue of tariffs so that you have a better understanding of what it means and why it is not the scary reality that traders would like you to think.

As depressing as February was, it certainly was not unexpected. The stock market has been going up continuously since November 2016, so a pullback was to be expected. Despite appearing scary at times, the pullback in February was relatively minor. Higher volatility always leads to unnerving to the less than committed investors. One thing that I will always emphasize to investors is that stocks pull back for a reason. Therefore, you must analyze the reason and interpret whether it is real or imaginary. As for the month of February, it was completely imaginary.

In February, the Standard & Poor’s 500 index was down 3.7%. However, do not lose sight of the following important information. For the 2018 year, the S&P 500 is still up 1.8% and up 17.1% for the one-year period. The NASDAQ composite was down only 1.8% for the month of February and up 5.5% for the 2018 year. The one-year return for this index is 26.1%. The Dow Jones Industrial Composite was down 4% for February but was still up 1.7% for 2018. It was also up a satisfying 23.1% for the one-year period ended February 28, 2018.

Also, if you believed for a second that your asset allocation should have been more heavily weighted in bonds to take the volatility out of your portfolio, you would be wrong. Bonds did not offer any protection against volatility in February and, frankly, have underperformed for basically years. I am always baffled when I see a young person allocate a portion of their portfolio to bonds with no discernable good reason. Maybe they read a magazine article that threw out the generalization that everyone should own bonds. In many cases, that advice is just wrong – very wrong for this year so far!

As demonstrated in February, the Barclay’s Aggregate Bond Index was down 0.09% for the month and is down 2.1% for the year. More importantly, for the one-year period, the bond index is only up 0.03%. For the year of 2018, the S&P 500 index is up 1.8% and the Aggregate Bond index is down 2.1%. If you really thought that you were being protected by your asset allocation using a substantial sum of bond investments, you can see above that there is almost a 4% differential between those two indexes and that is only after 2 months in 2018.

One could blame the market volatility on the testimony of the newly appointed Federal Reserve Chairman, Jerome Powell. While watching these hearings, it is quite clear that these congressmen know nothing about economics. The Federal Reserve Chairman tries his best to avoid giving a direct answer to a question where no direct answer probably exists. Economics is a lifetime study. That being said, speaking about complex economic concepts to congressmen with no training in the field always leads to comical conversations. What is not comical, and downright sad, is that the congressmen’s lack of understanding makes a mockery of these hearings. I will give you some examples below:

One of Chairman Powell’s remarks was that his personal outlook on the economy had strengthened since December. That is a good thing for everyone involved. Anytime the economy improves, everyone’s life is better. However, the immediate reaction was reflected by the stock market with a sharp move down almost 300 points and a rise in long term interest rates. Who would have thought that just a few words could be so powerful?

Everyone was so concerned by the rise of average hourly earnings for private sector workers in January, which increased by 2.9%. They missed several other points made by Powell. What nobody put into context was that there were numerous states across the U.S. that increased their minimum wage at the beginning of January. Also, no one factored in the effect of hundreds of thousands of bonuses given to employees due to the tax savings on income taxes. This is a prime example of traders reacting to news that they clearly did not understand, as both of these events were one time occurrences. What they failed to acknowledge is that Federal Reserve Chairman Powell stated subsequently that were currently no signs of wage inflation. Due to the overreaction from the first comment above, traders missed his point that even with the increase in wages in January (which is a good thing for everyone) the inflation cycle was not accelerating.

Most importantly, Federal Reserve Chairman Powell stated, “There is no evidence the economy is currently overheating.” To illustrate how traders perceived the same information, the market sold-off a thousand points over the next several days based upon the first quote without any concern or evaluation of the final two. So, what did happen as a result of new Federal Chairman’s comments? The news was inadvertently good. The economy has improved since December and wage increases are good, but do not add to inflation and the economy appears to him to not be overheating. A slam dunk of good news, but the market sold-off over a thousand points!

One of the common approaches used by hedge funds today is to use leverage in their investing portfolio. By virtue of borrowing against the equity of the fund, they use those borrowed funds to double up on their stock positions. One of the great lessons learned from the 1929 crash is the improper use of leverage. At that time, you could leverage a portfolio of stocks by 90%. For example, if you had $100,000 in equities you could essentially borrow $90,000 worth of debt to buy additional investments. That looks great when the market is moving up but is a disaster when the market is going down. Envision the great market crash of 1929 when the Dow dropped over 27% in a couple of days. In this example, your $100,000 portfolio after would be worth $73,000. However, your debt would remain the same at $90,000. As you can see, your portfolio would now be underwater and you would owe the brokerage house the difference. Whether it was actually true or not, the stories of investors jumping from their windows in 1929 seems plausible.

Wall Street has frequently used leverage to exaggerate portfolio returns. When the market dropped as fast as it did during February, it was reported that some hedge funds had used leveraged ETFs, and due to this strategy, closed down close to 90% during the month. As in 1929, leverage is great on the upside but can be devastating to your portfolio on the downside. This is one of the reasons why we, at Rollins Financial, do not use this leveraged approach. This is the difference between investing and speculation. We prefer to get rich the old-fashioned way, slower rather than faster.

Ava in Basics 4 Ice Skating

In the preceding week, President Trump announced that he would impose 25% tariffs on steel coming to the United States. In addition, he would recommend tariffs of aluminum coming into the United States at 10%. There was a huge market sell-off from traders, and the economists, universally, panned the idea as being borderline ridiculous. The financial market’s commentaries were universal in their disgust at such a proposal as well. And their reason, other countries would retaliate with tariffs of their own. They also assumed the tariffs would increase the cost of manufacturing in the United States, therefore, creating inflation which would be damaging to financial markets and interest rates.

First off and most importantly, we do not even know what products these tariffs would be applied. In addition, we do not know when they will be effective and which countries will be excluded. But there is a lot more to understand about tariffs than the simple definition used in context with imports.

Let’s examine exactly what happens when tariffs are applied. First and foremost, our steel in the United States does not come from China in great quantities. Less than 3% of the steel we import into the United States is from China. The vast majority of imports either come from Canada or Mexico. Over 25% of all steel imported in the United States comes from these two countries. Many believe China ships steel to Canada to import to the U.S. to avoid detection. A clear case of where sanctions are needed.

To think that either of these countries would not continue to import steel to the United States would be financial suicide for them. More importantly, maybe they would actually consider relocating their manufacturing plants to the United States. If you had a Canadian manufacturer that would only need to relocate a couple hundred miles south to be in the United States to overcome the tariffs, this move would not only be economically feasible, but a good thing for the U.S. economy. Might the proposal regarding tariffs be more designed to create a better economy in the United States rather than a detriment to imports?

One of the things I fully agree with from the President’s perspective on tariffs is that we cannot have a country devoid of steel manufacturing. Because steel is the component of so many items that we manufacture in the United States, we could never get into a situation where the country would not be self-sufficient in steel manufacturing.

Most of you probably do not remember the oil crisis in the early 1970s. I vividly remember it, and hope to never go through anything like it again. Due to the political issues of Israel and Saudi Arabia in the 1970s, Middle Eastern countries producing oil decided to boycott the United States. They were not going to sell oil in the United States due to the U.S.’s military support of Israel against Arab countries. The effect of this boycott was unbelievable. I remember getting up at the crack of dawn and standing in gas lines for close to an hour just to get any type of gasoline at all. Often times, after waiting and waiting, the gas station would run out of gas and all of your time would have been for nothing. The reason that these long gas lines existed was that the United States had no oil production sufficient to satisfy the needs of the economy. In fact, it created a national security crisis since our country could not operate without oil. The resulting effect, of course, was recession in the United States for several years and inflation that reached close to 13% during President Jimmy Carter’s years.

Consider the same for steel. Since we need steel to manufacture products in the U.S. such as automobiles, construction equipment, etc. what would be the economic fall out if we didn’t have any? If, for whatever reason, some countries decided not to sell steel in the United States, what would be the end result? The end result would be a massive recession in the United States, probably leading to depression. In addition, it would become a national security problem if we could not provide military armament in the case of war. In fact, the end result of not being able to produce steel in the United States would likely empower some evil country to try to use our economic weakness for their military superiority.

Okay so maybe I over-exaggerated the effect of not having steel. However, it is absolutely clear that we need more manufacturing of steel in the United States and we need it now. And there are many reasons why tariffs make sense. If steel manufacturing is being subsidized by a government and foreign countries, and then shipped to the United States for economic profits, that is not fair to American manufactures and should be offset with tariffs. Believe me, I am a huge advocate of free trade without government involvement. However, if you consider the extreme cost to ship steel, due to its extraordinary weight and density, there is no way you could manufacture it halfway around the world and sell it cheaper in the United States than steel manufactured locally. And if you disagree, well then I have some oceanfront property in Arizona to sell you. Without question, there is government subsidy going on, and free trade can only occur when the government is not a party to the transactions.

So rather than a 5% selloff in the market for the perceived evil of tariffs, maybe it would be better to wait and see what happens. It will not be easy to enforce tariffs with Canada and Mexico due to the NAFTA laws that are in place in both of those countries. And to assume that any country would retaliate with their own measures borders on fantasy. The U.S. is by far the strongest economy in the world and it is also the biggest consumer of these goods. Any country deciding to boycott U.S. products would be committing economic suicide. Anyone who believes that China would not sell to the United States as a result of these actions clearly does not understand where the strength in the Chinese economy comes from. With the U.S. being a major importer of goods from around the world, a simple tariff on a product so minute to the U.S. economy is not going to create either shortages or inflation. Therefore, I disagree with the economists that speak on the news - I think the threat of tariffs might just get the job done by forcing relocation to the United States.

I have mentioned several times that there is no reason to fear North Korea from a military standpoint. Several times over the past year the financial markets have been paralyzed with fear over the potential that North Korea could send a nuclear missile directly to the United States and create massive damage. As I have often explained, for the last 25 years, U.S. presidents have essentially “bought off” North Korea. President Bill Clinton approved massive funding of North Korea in order to slow down their nuclear development. President Georgia Bush also continued this funding to keep North Korea out of the highlights. President Trump elected to call their bluff. Basically, he said we are not going to give you any money to empower your military establishment. In addition, we will insist that China not continue to fund your oil industry and import products into North Korea. Did you actually understand the effect of this policy?

In the last two weeks, the winter Olympics was held in South Korea which is the mortal military enemy of North Korea. Low and behold the sister of Kim Jong was honored as the South Korean’s guest for this Olympics. In addition, athletes from North Korea participated in the events and their hotel stay was fully funded and paid for by South Korea. Even the headlines said that North Korea was seeking appeasement with South Korea after 70 years of hostile relationships. The one and only reason leading to this reconciliation was the economic sanctions placed on North Korea by the United States. Those of you that are skeptical of the power of economics over the power of military actions need to see this and understand its consequences.

So, to summarize, the month of February was not a good one. However, after 14 straight months of profitable investment months did you really think we would not have a down month? Investing will always come with its ups and downs but you have to evaluate the reasons for that volatility. Are the reasons based on real economic events or are they based upon the wide fluctuations created by momentum traders and hedge funds. I think the commentary above illustrates that the reason for the volatility in February was more on the latter rather than former. The one true economic analysis you could bring from the volatility of February is that if you have idle cash sitting around, it is time to invest it for future gains.

Valentine's Day 2018

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

Best Regards,
Joe Rollins

Tuesday, February 13, 2018

"A 10% correction in the stock market due to the economy being too strong? Let me explain."

From the Desk of Joe Rollins

On the first weekend of February 2018, I fully intended to write this blog and explain how fabulous the month of January had been for the equity markets. Actually, the markets turned in a record performance in January. The Standard & Poor’s 500 index reached all-time highs for each of the first 6 trading days of 2018. You would have to go all the way back to 1964 to witness such a tremendous run and astounding highs for the beginning of a year.

Unfortunately, I was out of town during the first week of February, so I had to delay writing this blog for a week, but what a week it was. In the first 7 trading days of February, the S&P 500 actually fell by 10%. It was not the normal sell-off that you would expect when there are financial difficulties. Based upon the analysis of many market watchers, the sole reason for the huge sell-off was because the economy was financially too strong! I am sure this probably sounds illogical to you, because it certainly does to me; to have a sell-off of this magnitude just because the economy’s growth is actually too good is baffling.

In this blog, I fully intend to explain to you the difference between investing and speculation. I also intend to try to explain how the market can be down over 1,000 points on 2 of the last 7 days without any corresponding negative economic occurrences. In fact, this huge sell-off was accompanied by nothing but excellent financial news. As former Federal Reserve Chairman Alan Greenspan would say, “It’s a conundrum”.

While I plan to cover all of the aspects of this sell-off, as is my habit, I really need to explain how good January was in order to set the picture for the sell-off.

The S&P 500 index was up a sterling 5.7% for the month of January and up 26.4% for the one-year then ended. The NASDAQ Composite, the best performer of the major index, was up 7.4% for the month of January, and 33.4% for the one-year period ended January 31, 2018. The Dow Jones Industrial Average was up 5.9% for the month, and 34.8% for the year ended. Interestingly, the Barclay’s Aggregate Bond index was actually down 1.2% for the month of January and has risen only 1.9% for the one-year period ended January 31, 2018. As I have been writing in these blogs for many years, there is a high likelihood that bonds will continue to underperform given the strong economic growth and the increase in interest rates.

Ava enjoying the beach in St. Petersburg

January was quite an extraordinary month, but then all hell broke loose when the employment numbers for the month of December were announced by the government on February 2, 2018. This was also the day following the announcement of Apple’s quarterly income report. In this report, they announced that their earnings for the fourth quarter of 2017 were the highest quarterly earnings ever recorded in American finance. In addition, they announced ongoing strength in their operations and projected exceptionally high profits for 2018. It may seem very perplexing that the market would sell-off 10% over 7 trading days after both of these excellent economic terms were reported.

I would like to put into context something that is often misunderstood by the average investor. When I ask potential clients how many times the S&P 500 has fallen in the last 15 years, more times than not their answer is at least half. Much to their surprise, the S&P 500 has been up 14 of the 15 previous years. In fact, the S&P 500 has gained 10.1% per year over the last 50 years (1968 to 2017). And this is in spite of the fact that they endured 7 bear markets of a 20% or more decline. Just think about the economics of that statement. Even though the markets went down 7 times over the last 50 years, with a decline of 20% or greater, the market has still gained 10.1% over that time period. That strength is nothing short of incredible.

All of this is based upon an economy that has been subpar in prior years. If the year 2017 is not revised to a growth of at least 3%, which is highly unlikely, then we will have our 12th consecutive year of less than 3% growth in the U.S. economy. This includes the years 2006 to 2017. The current estimation of growth for 2017 is likely to be in the 2.3% to 2.6% range. What is even more remarkable about this fact is that the next longest streak is not 12 consecutive years, but only 4 years of less than 3% growth from 1930 to 1933. For those of you that do not remember those years, that was in the midst of the Great Depression.

In an attempt to try to understand why the markets would sell-off so abruptly in light of such great economic news, you have to play the “what if” game. I believe the traders came to the conclusion that the Federal Reserve would have to step in and substantially increase interest rates in the face of such strong economic growth and higher inflation, with higher interest rates becoming an alternative to stocks which in turn would drive down stock prices. Although there is absolutely no evidence of this, whatsoever, it was apparently enough for traders to bring the markets down. I will later explain how momentum traders work, but first I need to cover the economics of why the assumption that they acted on to bring the markets down borders on the absurd.

For the first time in my recollection, we are in the midst of a worldwide economic move up. China grew at a 6.9% GDP in 2017. Japan, which has suffered through 3-decades of near recession, registered its 7th straight quarter of GDP growth. If 2017 finishes the year up 2.6%, in the U.S., virtually every developed country in the world will be showing economic strength. So, the assumption that the Federal Reserve would be required to increase interest rates is based on the assumption that they could increase interest rates while the rest of the world would sit back and let them do so. Not likely!

As of Friday, February 9, 2018, the 10-year Treasury was yielding 2.85%, which had moved up significantly since the beginning of 2018. However, the German 10-year bond rate is only at 0.784% and the Japanese 10-year bond rate is at 0.066%. Does anyone with any economic training believe that the Federal Reserve could increase interest rates significantly while the rest of the world has significantly lower rates? As you know, money goes where it is treated best. If the U.S. has the highest interest rate in the world, money will flow to the U.S., strengthen the dollar, discourage exports and significantly impact the employment in the U.S. To think the Federal Reserve would make a move that would hurt the U.S. economy is not even plausible.

What do we know about our own U.S. economy? It appears quarterly earnings for 2017 are up 5.5% from 2016. But first we need to understand exactly what we are talking about because corporate earnings for 2018 are forecasted to jump a robust 22.5%. Yes, you are actually reading that number correctly. A 20% increase of corporate earnings in the U.S., but the stock market falls 10%? Of course, much of the expected corporate earnings in the U.S. are due to the significant reduction in income taxes for corporations. However, all the good news has yet to be told. Everywhere you read, corporate America is announcing bonuses for employees due to the tax cuts. The entire world has proposed building plants in the U.S. because of the tax cuts. There is unequivocal evidence that the GDP should be higher in 2018 than 2017 based upon the increase in corporate earnings alone.

There are also other economic indicators that cannot be ignored. The Federal Reserve Bank of Atlanta is now forecasting for the first quarter of 2018 to increase by 4%. This is not someone on T.V. making projections based on wild economic data; this is the actual Federal Reserve Bank of Atlanta. They anticipate strong economic growth in the first quarter of 2018 even though, historically, the first quarter of any year is the worst quarter of the year. There are a lot of reasons why, but the primary reason is the effect that weather has on construction in the U.S. This particular year, bad weather has been a significant negative factor to growth and, therefore, if we actually realize a 4% growth, it will be impressive given the negative economic evidence.

Let’s just say you agree that I have quoted strong economic information for 2018. So why do we still have a 10% sell-off? The first reason is that it has been over 1.5 years since we have even had a 3% correction in the market, let alone even 5%. We have become so used to the market grinding higher on a daily basis that we forget what a minor correction means. You have to have corrections in order to bring new players into the market and as I have quoted often in these pages, you can expect a 10% correction at any time in financial markets. They are not only expected but they are welcomed, as they allow for the process of “bottoming” and the market can move forward.

More than likely, the main reason we saw this significant sell-off over 7 trading days had more to do with true momentum traders and hedge funds than economic reality. It helps to actually understand the mentality of traders to understand why something like this would happen. If you are really interested in the subject, there is a fascinating book written by Michael Lewis titled “Flash Boys: A Wall Street Revolt”. You may know that Michael Lewis is the same author that wrote the best seller “The Big Short” relating to the decline in the real estate markets in 2007 and 2008. Even further ago, he wrote another book based upon economic events called “Liar’s Poker”. Therefore, I believe he is eminently qualified to analyze economic positions and write upon actual evidence rather than concepts.

In the book Flash Boys, he explains that these traders trade on momentum not fundamentals. If the trend is down, they trade down. If the momentum is up they trade up. They do not care what the fundamentals are. You often hear people explaining that the market had been controlled that day by program traders. This is what we mean when we talk about momentum investing vs. financial investing. During this 2-week period, it is almost assured that the momentum traders and the large hedge funds were in coordination in attempting to move the market. Each of these trading techniques requires that they borrow large sums of money from the local banks in order to magnify the movements by selling against sole momentum. Since they do not consider fundamentals, they live under the philosophy that a trend is a trend until the trend is broken.

I am sure some of you reading this will immediately say we should ban these traders because they clearly have a negative effect on your portfolio. I could not disagree more. The reason the market is efficient is because it has liquidity. If you want to sell your stock at any time, day or night, you can do so. You may not get the price you want, but at least you can get your money. There are many markets in the world where there is not a ready market to buy your security. The momentum traders create the liquidity that is critical for investing. You may not like what they do day-in and day-out, but you cannot disagree that they provide a benefit to the market and are therefore needed.

One of the things I noticed this week is that people assume that the sell-off in the market is a lot worse than it actually is. As of February 9, 2018, even though the S&P 500 index was down 7.16% for the month of February, it is actually only down by 1.85% year-to-date. Given the volatility of the market lately, a 2% decline could be either made up entirely or double just in one day of trading.

So, assume that you do not want the volatility of equity investing but rather you prefer the stability of the bond market. In this sell-off there were no prisoners. Everybody went down with the ship. As of that same date, the S&P 500 is now 1.85% and the U.S. Bond Index is down even further at 2%. Therefore, if you chose the conservative nature of bonds as opposed to equities, you would have lost even more. In addition, the international markets also fell by almost the same percentages as the U.S. market. So, the sell-off is worldwide and there are no safe havens, but I guess you could say that is exactly what the momentum seller and hedge funds wanted.

Wine Weekend in St. Petersburg, 2018

Dakota and Joe

Jennifer and Eddie

Danielle and Robby

At Rollins Financial, we promote investing, not speculation. We do not invest in gold, silver or Bitcoin. None of those are even really an asset class, not particularly rare and have no liquidity value. If you bought Bitcoin, just read the horrors of people trying to sell it but cannot create liquidity. We invest in the fundamentals of the stock market going forward and don’t look back at what happened last year or the year before.

I have studied financial markets for close to 40 years and there is absolutely only one slam dunk conclusion you can draw. Recessions bring negative stock market performance. Virtually nothing else will forecast a bad stock market unless there is a forecasted economic recession. There is no evidence whatsoever in any financial matters today that a recession is anywhere in sight.

In fact, quite the opposite is true. As mentioned above, corporate earnings are projected to grow in excess of 20% in 2018. In my personal opinion, that number will be even higher since we do not know the full economic effects of the new tax cuts. The entire world is rushing to build in the United States which will increase employment and it will make wages go up benefitting the average worker. As wages go up and corporate America uses their capital to build plants and equipment, the average worker will benefit from higher wages. In addition, regular GDP growth for 2018 is likely to be 3.5% which would be the highest over the last 12 years.

And the economic future continues to get rosier. This past Friday, the President signed into law an increase in federal spending of over $300 billion dollars for 2018. This increase in federal spending would be for higher military expenditures and infrastructure increases. If you compound the economic growth of this increase, the numbers are quite staggering. Based upon the velocity of money, a $300 billion increase in spending could actually generate a sevenfold increase in GDP of over $2 trillion. I know we are talking about numbers that are hard to even fathom, but to simplify it; a good economy has the potential to get better when federal money is added to the equation.

Let me express two concerns that clients have asked me to expand upon: First, many are concerned that China is buying up all of our U.S. debt and will therefore essentially “control” the U.S. as a large holder of our debt. Therefore, a massive sell-off of Chinese bond holdings would substantially wipe out the U.S. economy. Just so everyone understands, China needs us a lot more than we need China. Without the U.S. buying from China, the Chinese economy would be nothing. In addition, the Chinese have a need to stabilize their currency against the U.S. dollar and they do so by investing in U.S. bonds. It would be financial suicide for China to consider any major liquidation in U.S. treasuries since it would strengthen their own currency making their exports non-competitive. That concern should never affect your economic projections.

Second, while it is true that the large tax decreases will create federal deficits, is it just not possible that economic growth created by this economic stimulus would not increase federal revenues? There are many that are forecasting that if the tax decreases increase GDP by only 0.5% for the next three years, then these tax cuts will in fact pay for themselves. Just the repatriation of funds by U.S. corporations from international banks is already creating potential tax revenue to the U.S. Treasury by over $1 trillion over the next 10 years. The economic news just keeps getting better.

I am giving you a lot of economic numbers and financial circumstances to consider. As I often write in these reports, believe what you know and discount those that forecast negative economic evidence. The three major components that control the market are corporate earnings, interest rates and the economy. This month, going forward, all three are substantially stronger than they have been in years and all are likely to increase the market going forward. Therefore, my advice to investors is basically, do nothing. Yes, we evaluate this every day and may change on a dime if we see something new but at the current time, given the strong economic evidence going forward, no changes are warranted in your portfolios.

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

Best Regards,
Joe Rollins

Wednesday, January 3, 2018

"Yes, Virginia, there is a Santa Claus" - Francis Church, September 21, 1897

From the Desk of Joe Rollins

You are probably wondering why I selected the title above for my year-end blog. I have heard it my entire life, but I never quite found the opportunity to use it in a financial blog. Now I can. Two days before Christmas, our current president, Donald Trump, signed into law one of the most sweeping and, potentially, the most beneficial tax changes in the history of American finance.

In the following commentary, I will hopefully be able to explain to you exactly how the economic benefits that flow from this tax change will affect all of our financial lives going forward. This is a really big deal! Also, I want to reflect on the fact that in 2017 the S&P 500 index had basically a perfect record. This was the first time ever in the history of American finance that the market was up every single month, having no negative months for all of 2017. This is a record that is unparalleled in American investing. You are probably wondering, "How did this happen?"

It might be that we are beginning to witness the start of a few financial golden years in the United States. No longer will corporations be required to relocate outside the United States due to lower tax rates. In fact, they will rush to manufacture in the United States due to the excellent business environment here. In addition, we never believed that we might accomplish energy independence. However, due to technology and the innovation of the oil industry, we are no longer dependent on Middle East oil in the case of a crisis. We have full employment in the United States, interest rates are at historic lows, corporate America is generating more profits than ever and its economy is getting stronger by the day. This might just be a recipe for a few golden years in the U.S.

Ava as flower girl in Carly and Erik's wedding

Crown of Statue of Liberty, November 2017

Snow in Atlanta?!

Before I can get to all of those very important subjects, I need to give you the year-end financial results, which were excellent.

Needless to say, the scorecard for the year 2017 was nothing short of spectacular. As I reflect back on the year, although I had projected a nice increase in the beginning of 2017, I wasn’t even so optimistic as to see this level of returns. For the year 2017, the Standard & Poor’s 500 index was up a sterling 21.8% and has averaged a 5-year return of 15.8%. The NASDQ composite was up 29.7% for 2017 and the 5-year average has been 19.4%. The Dow Jones Industrial average was up 28.1% and has averaged 16.4% over the previous 5-years. Just for a basis of comparison, the Barclay’s aggregate bond index was up 3.3% for 2017 and has averaged 1.9%. It is clear that bonds have not even come close to keeping up with equity investments for the last five years.

The month of December was somewhat odd in that growth actually trailed value investments during the month. The international funds continued to be strong and the bond funds returned almost nothing. While it was a relatively subdued market in December, it ended as one of the most productive markets of all time. If you know anything about the markets, you know that you must be invested when we have excellent years. I have never understood why there is so much money sitting in cash earning exactly zero during these very profitable investing years. Are you one of these investors?

This is what happens in corporate America when you decrease the corporate tax rates from basically 35% to 21%. You can see the positive benefits that this tax cut will have on future earnings. As I have reported so many times in my personal blogs, earnings are by far the most important component of the stock market valuation. After the signing of the new tax bill on the Friday before Christmas, corporate America has been overwhelmingly expressing their satisfaction. This was done in the form of many corporations giving bonuses and salary increases to their employees. Companies were falling all over themselves to explain how they were going to use this tax reduction to benefit America. That, my friend, was exactly the intent of the new administration.

I read so many publications and newsletters that I oftentimes forget exactly where I have read a quote. Many indicate that the approval rating on this tax decrease by Americans was only 30%. Presumption being that 30% of the U.S. population agreed with the tax decrease so therefore 70% either disagreed with it or had no opinion on the subject. But frankly Virginia, if you do not agree with the tax cut then you do not understand Economics 101.

The reason the stock market has been so good in 2017 is very simple. Economics has benefited corporate America and their earnings have gone up. Ever since the election of the new president, the administration has dramatically reduced regulations throughout corporate America. In addition, the economy has greatly improved resulting in higher earnings. Higher earnings support the stock market going higher and as it did in every single month in 2017. Stock market performance is a direct result of higher earnings.

You need to understand basic economics to understand the effects of the tax cut on corporate America. There are so many publications and negative articles written due to the fact that they do not understand how corporate America records their tax provisions. I read the negative reports that say that the average American corporation only pays a tax rate of 21% and therefore this tax decrease will not benefit them. They may have in fact only paid 21%, but they are required to record on their books at the highest statutory rate north of 30%. A 5% return to a company’s bottom line under the old rules will now generate a return of 15% to their bottom line under the new rules. These amounts will be nothing short of staggering and beneficial to these corporations and, therefore, America.

In addition to the wonderful benefits of the corporate tax rates, virtually everyone will receive a reduced tax rate. I recognize that it is impossible to reduce the tax rate of someone who pays no tax, and therefore that argument is completely moot as far as I am concerned. However, when you decrease tax rates among the broad population you will benefit all Americans. Almost universally, this money will be spent creating higher commerce which will create jobs. Jobs create economic activity and therefore a higher standard of living for the general population.

While questionably the deficit is on everyone’s mind as we go forward, I have reviewed the projections and have a high-level of optimism that in fact the deficits may not be nearly as high as projected. If you want to get a real feeling for the plan, you have to understand the difference in economics under the old administration and the new administration. For the 8 years in the previous administration, the GDP averaged 2.1%. Interestingly most of the bad quarters were late in the presidential cycle, not early. This was the lowest GDP growth realized over an 8-year period in America since WWII.

The new administration took office in 2017, and every quarter a GDP growth of 3% or higher has been realized. In fact, going into 2018, the GDP growth is forecasted above 3% in virtually every quarter. If, by chance, these tax decreases could increase economic activity by only 0.5% per year, there is a high likelihood that over the next 10 years, in regards to our $1.5 trillion deficit, these tax cuts could essentially pay for themselves. If you believe that these tax cuts will result in corporate America creating more jobs, paying more dividends or buying back more stock to create value to the average investor then you can certainly see the economic growth increasing significantly going forward. All as a result of the tax cuts.

I also read many articles that take the position that money repatriated from overseas to the U.S. and then spent to pay dividends or to buy back stock is not beneficial. I am just not sure what planet people making that exclamation live on. If money that is sitting idly earning virtually nothing overseas is brought back to the United States with a 15% tax rate, and then the corresponding corporation uses that money wholly to pay dividends and buy back stock, every single leg of that transaction creates income tax to the U.S. government. How anyone under any definition could see that as a negative defies economic reality and basic common sense.

The most interesting financial result is that for the first year in a very long time we are witnessing a world-wide boom in economic activity. The entire world appears to be on the upswing. There is also a high likelihood that during 2018, inflation will pick up which will dramatically increase the value of commodities. This increase in commodities will be a huge boom to the emerging markets that depend upon oil for their wealth. So not only do I expect to see the U.S. economy strong, averaging a GDP of roughly 3.5% for 2018, I expect to see the rest of the world’s economies pick up which will improve the sales of U.S. corporations in all countries around the world. If you review the projection I made at the beginning of this year, I assumed that the S&P 500 would be up 10% in the year 2017. I may have been one of the few forecasters that would even venture a number as high as double digits at the beginning of the year. Fortunately, I was very wrong and the S&P ended up 21.8% - more than double my projection. However, from a strictly arithmetic standpoint, my projection was not very far off. The difference in the projection and the actual was that I projected a multiple of 17.5 times projected earnings in 2017. In fact, the multiple ended up being just north of 20 times and therefore the error in calculation

While you may think a 20 multiple on earnings is excessive given the potential growth of earnings and the expansion of the economy, and interest rates being low for most of 2018, it is not a reach to come to that conclusion. Therefore, my projection for 2018 is based on simple arithmetic. The Standard & Poor’s company has projected earnings of $145 per share on the S&P 500. This projection was not based upon the new tax rates that are currently in existence. Therefore, my estimate is that corporate earnings will go up 17% and, therefore, $169 per share.

In last year’s projection I made an assumption that earnings would grow between a multiple of 17 to 18 and I elected to pick the halfway mark of 17.5. Currently, earnings are at 20 times, but historically that is too high. Using a high but reasonable multiple, given the increase in earnings, I would use an 18 multiple which would project the year-end S&P at 3,042. Using some sort of geopolitical event that might reduce earnings during the year, I will round down to exactly 3,000 since everyone likes rounded numbers. Therefore, the increase in earnings from today’s valuation at 2,673 to exactly 3,000 would mean that the S&P would go up $327 or roughly 12% for the year. To that you would add the dividend ratio of the S&P 500 at roughly 2% for a total of 14%. Therefore, my projection for the S&P 500 going forward for 2018 would be somewhere between 12% and 14%, so for the sake of averages, let’s say a 13% growth for all of 2018.

Yes, it is true I was wrong about 2017 and I hope I am wrong about 2018 in a good way as well. I would much prefer that the return on 2018 be much higher than 13%. However, any high single-digit or low double-digit number would be a welcomed result, after the sterling results we had for 2017. It has been nothing short of a spectacular financial year, and I have nothing but encouraging thoughts going forward. If the tax cut does as I project and the administration continues to keep the government out of business’s way, it could lead to a world-wide economic boom that lasts for 4 to 5 years. We all are hoping so!

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

Best Regards,
Joe Rollins

Tuesday, January 2, 2018

14 out of 15 is not bad; it is great!

From the Desk of Joe Rollins

Every year, I try to give you a scorecard on how the stock market is doing from an investment standpoint. Based on the chart below, the Standard and Poor’s index of 500 stocks has now been up 14 out of the last 15 years. Every day, I am confronted by cynics in the stock market that just cannot believe that the market is real and goes up every year. However, the chart below absolutely proves without exception that if you intend to retire on an income similar to the one you earned during your working years, you must be invested in assets that appreciate like the stock market. As reflected in the chart below, if you had invested $10,000 on January 1, 2003, at the end of December 31, 2017, your investment would be worth $41,309. You do not have to be a rocket scientist to calculate that your original investment of $10,000 was up a cool 313%.

Over and over again, I meet with potential clients who sold all of their investments in 2008 and never reinvested. Their reasons for not reinvesting vary, but almost none of them reflect economic reality. Basically, this chart says that if you had invested in the S&P 500 Index in 2003 and had done nothing whatsoever with your investments, including during the 2008 correction, you would be 313% better for having done so.

I doubt there is a clearer advertisement for investing going forward than the chart above. We are not even talking about actively managed investments here; this is just a passive index of the 500 largest corporations in America. It does not include international investing or even emerging markets, which has the potential in 2018 to be a very strong performer. My goal for sharing this chart is to provide you with information that will allow you to evaluate your investments going forward.

I am sure that you are anxious to hear my year-end evaluation of the stock market and my projections for 2018 but, unfortunately, you will have to wait another 24 hours to read all about it. In the meantime, if you have any questions regarding the numbers reflected in the chart above, please let me know.

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

Best Regards,
Joe Rollins