Thursday, February 6, 2020

I Ignore the Headlines - Just Show Me the Money!

From the Desk of Joe Rollins


As I sit in my office every day and watch the results of the earnings of the major corporations of America report for the fourth quarter of 2019, I am actually blown away as to the absolute dollars in profits they are showing. I watched the other day as Apple reported earnings of $22 billion. Not gross revenue, but net income. Other earnings that have been reported are nothing short of outstanding. Yet, I also sit here every day watching the market go down over totally meaningless non-economic events.

We see the nonsense of the geo-political impeachment hearings, which everyone knew the outcome before it even began. We tried to make the Coronavirus in China important, yet anyone who has any level of reasonableness knows it is not. What I do see, though, is an incredible earning machine in America that is coupled with historically low interest rates and a fabulous economy moving stocks higher.


 Ava drinking from CiCi’s water – Age 3

I want to report things that I find of interest this month, but I want to reassure the readers that economically things are just fine. It may be true that the market goes up and down based upon non-economic events, but anyone investing should realize that in the long-term these things mean nothing. As the short-term traders push the market down, they short the stock indexes and buy treasury bonds. For a day or two, both the stock market equities and the bonds are distorted due to the traders’ actions. However, a few days later the traders reverse that action and nothing has actually really happened. It went down one day and up a few days later. Why anyone would think that they need to do trade around this event overemphasizes how quickly they could move to accomplish that goal. They cannot!

I will attempt to discuss these items and the effect of the economy due to the Coronavirus. Mainly, I want to emphasize how profitable U.S. corporations are and how lucky we are to live in a country where the economy is nothing short of spectacular. While I want to cover all of those important subjects, I need to give you the scorecard for the month of January.


37-year clients Randy and Kathy Wittman, their son, 
Ryan, and their first grandbaby, Robert James Wittman

For the month of January 2020, the Standard & Poor’s Index of 500 Stocks was actually exactly zero. No gain or loss at all during the month of January. Obviously for 2020, it was also zero. It is important to note over the last three months, the S&P of 500 Index is up 6.7%. During the month of January, the Dow Jones Industrials were negative 0.9%. Also, for the year to date, the return is exactly the same. Over the last three months of the year 2019, this index was up 5.1%. The NASDAQ Composite was the big winner for the month of January, up 2.1%. Over the last 90 days this index has jumped higher by 10.7%. These are extraordinary numbers.

The Bloomberg Barclays Aggregate Bond Index was up a very satisfying 2.1% during January and for the year 2020 so far. Averaged over the last three months, this index is up 1.8%. I think it is truly informative to look at the long-term return on these indexes and your portfolio. The S&P 500 Index over the last ten years is up 14% annually. The NASDAQ Composite is up 16.9% and the Dow Jones Industrial Average is up 13.7% annually. If you compare all of these indexes to the bond index, the Bloomberg Barclays Aggregate Bond Index is up 3.7% over the last decade. As you clearly can see, each of those indexes were up mid double-digits, while the bond index was basically 25% of the equity indexes.

One day, I was flipping through the channels and I came across a left-leaning 24-hour news program. If they were reporting news, then clearly they had not checked the facts. This particular day, the two commentators were making fun of the U.S. economy as it currently existed. Their comment was that the GDP in the United States at 2.1% for 2019 was a joke. In fact, they said that it was not even as good as the economy during the President Jimmy Carter years. I almost burst out in laughter at the ridiculous and incorrect comparisons to the U.S. economy today, which is extraordinarily good compared to the Jimmy Carter years, which were extraordinarily bad.


Ava and a Rockette at the Christmas Spectacular – Age 4

So, in order to properly evaluate the two economies, I went back to look at the economy during that time. We all seem to forget that when Jimmy Carter took over the Presidency after the Watergate Scandal, we had very high unemployment and very meager growth. In fact, in 1980, which was the last year of the Jimmy Carter presidency, the unemployment rate was 7.2%, the GDP was a -0.3% and inflation was 12.5%. If you recall the famous “Misery Index” promoted by Jimmy Carter, he would add unemployment to inflation to determine how bad the economy was. Therefore, as he left office, the Misery Index was a very high 19.7%, even though it had only been 12.7% when he took office. You may recall President Ronald Reagan using the “Misery Index” against Jimmy Carter when he ran against him in 1980. When Ronald Reagan left office in 1988 the “Misery Index” was 9.7%.

To compare the economies today to the President Jimmy Carter years is almost laughable, if it weren’t just outright wrong. I am not exactly sure why the commentators bothered to quote economic factors that, clearly, they do not understand. Today, the “Misery Index” is 5.8%, one of the lowest ever registered under this hypothetical theory. When President Trump took office the “Misery Index” was 6.8%, and it has improved over the last 3 years.


MiaRose Musciano-Howard’s son, Mitch (15), 
Staff Sergeant with the nationally recognized 
Fayette County High School Drill Team

We are enjoying a time of truly economic good times. We have an unemployment rate that is at a 60-year low at 3.5%, inflation under control at 2.3%, and an economy that is growing just right at 2.1%. I will further clarify those terms later in this posting.

We have the trifecta of good news at the current time. You may recall the high price of oil during the President Jimmy Carter years, which saw oil at $20/barrel in 1973, but in late 1979 it jumped up to $107/barrel. Primarily this was due to the conflict with the United States and the Middle East, which temporarily cut off the supply of oil to the United States. Most of the people reading this posting do not even realize that during the 70’s we imported 40% of our oil from the Middle East. Today, in the United States, we import less than 10% of our oil and that number is declining annually.

In fact, for the first time ever, the United States is exporting oil and energy around the world. This transformation of energy is due to the technology that has allowed the oil industry to produce oil at a lesser cost. Even after 40 years of inflation impacting the price of oil, it is lower today than it was in the 1970’s. Which is a major economic boost to Americans by saving on gas cost.

It is hard to even fathom that in 1980, as President Jimmy Carter was leaving office, the rate of inflation was 12.5%. The rate of inflation affects every asset that we own, touch, and feel. The price of housing was going up in double-digit rates and not until 1986 did the inflation rate drop to just 1.1%. Therefore, to assume that the current economic environment could be compared in any way to the economic state during the Jimmy Carter presidency is “fake news” at its very best. Compare 19.7% “Misery Index” to 5.8% now.

I cannot comment on the stock market and its performance without going through in greater detail the economic effect of the Coronavirus and the effect it might have on the whole economy. What is interesting about this particular news item is the dramatic effect that China has used to combat the virus. It is hardly possible to believe that China built a full 25,000-foot hospital with over 1,000 beds to isolate the virus in just eight working days. Is their intention to use this facility until the virus is under control and later destroy the hospital in its entirety? If we had tried to build that hospital in the city of Atlanta, it would have taken a minimum of six months just to get a permit from the city. In China’s case, they completed it, start to finish, in eight working days.

Hysteria has taken over the news in a way not likely seen in decades in the United States. I fear that having three full-time 24/7 news channels has raised the hysteria level to a point of facts no longer being comprehended. It has been reported that Google has been flooded with inquiries about the virus being linked to Corona beer.  I cannot even make up these stories since it was reported in USA TODAY. It is hard to believe that anyone would consider Corona beer and the virus to be related, yet clearly that has become a problem for Google in their search for information.

The effect of the virus clearly has no potential of ever dramatically affecting either China’s economy or our own to a great degree. However, the sell-off in Asian stocks and the subsequent retreat by the U.S. markets make investors think there might, in fact, be some sort of worldwide economic negative impact.

Ava enjoying the snow – Age 8

In trying to illustrate this point, I will quote an illustration from this week’s Barron’s magazine; “In order to have any major effect on the U.S. economy, you would have to understand the magnitude of the downturn that would have to occur”. The U.S. economy this year is expected to generate $22 trillion in GDP. In order to have a 0.1% effect on the U.S. economy it would have to decrease the GDP by $22 billion. Understand that we are talking about one-tenth of 1% effect on the huge U.S. economy. It is believed that if Starbucks closes all of their stores in China that it would affect their revenue by $25 million per week while they are closed. If you do the simple math, it would take 880 weeks to even reach this 0.1% threshold. Basically, it would take almost 17 years before the closure of the Starbucks stores in China could reach the 0.1% threshold. To draw a conclusion of this particular virus having that effect borders on the absurd.

Unquestionably, there will be disruptions with manufacturing, and the effect that laying off employees due to the crisis will have. However, one of the major benefits has been that virtually all manufacturing in China has been closed for the last two weeks due to the Lunar New Year. As these factories get back to manufacturing, the effect will be more widely felt. However, to this point, the current economic effect is virtually zero.

The difference this time versus prior outbreaks of infectious diseases is the swift and positive effect the Chinese government has pushed through their economy. The incubation period for this virus is believed to be only two weeks. As two weeks pass, fewer and fewer cases will be reported. To this point, as I write this commentary, there have been only 400 deaths around the world reported from this newly discovered virus. As a comparison, in the 2017-2018 years in the United States over 80,000 Americans died from the common flu.

Once again, you can draw a parallel to understand the hysteria as reported in the media. Another interesting fact regarding this virus, that few people seem to understand, is that at the current time only 2.2% of the people that contract this virus actually die. Back when we had the problem with the SARS outbreak, 9.5% of those people that contracted the virus died. Even the more deadly MERS death rate was 34.5%. All I am trying to emphasize here is that, while not to be minimized, the effect of the virus on worldwide economies is miniscule compared to the $14 trillion Chinese economy or the $22 trillion U.S. GDP.

 Long term client from Nashville, Dr. King, in Kenya

As my headline reads, I have been truly astounded at the level of earnings that have been reported for the fourth quarter of 2019. As you may recall, the so-called “learned experts” were calling for an earnings decline in 2019, as compared to the prior years. In fact, great hysteria was created in the summer of 2019 when the bond yield inverted, forcing all the so-called authorities to predict recession and an earnings decline. Once again, the so-called experts are not so expert in predicting the future.

Earnings have been nothing short of spectacular for the fourth quarter of 2019. When you read about the earnings reports of Apple, Microsoft, Amazon, Google, etc., you just have to shake your head in amazement. These companies are putting up earnings that have never been seen in American finance. There are clearly companies struggling to keep up, such as all of the oil companies, and, of course, Boeing with its current problems. If you average in these lower returning oil companies with the high-flying tech companies, it looks like the fourth quarter of 2019, contrary to perception, will actually show a net positive increase in earnings.

When I look back on earnings and hear the commentary regarding the markets being overvalued, I almost have to chuckle to myself. At the lows of the financial crisis in 2008, the S&P 500 earnings were $49.51. Each year since 2008, these earnings have gradually grown, and in 2019, it is expected that the S&P 500 earnings will be $162.35. In order for stocks to continue to grow, earnings must continue to grow. It is now anticipated that the earnings for the S&P 500 will grow at 9% in 2020. Even more remarkable, it is expected that earnings for the first quarter of 2020 will grow at a sterling 4% from the 2019 levels. There are a lot of reasons for this anticipated growth. Primarily, though, it is due to the strong U.S. economy and an economy around the world that is starting to strengthen. I anticipate earnings for 2020 to be at $180, even higher than the forecast by most experts. A 360% growth from 2008.

Therefore, to assume that earnings have peaked, you would have to evaluate the other external events leading to a strong economy. Most interestingly, bond yields have collapsed to where the 10-year treasury is at 1.5% today. If you have not refinanced your house recently, you should seriously consider it. Interest rates are now at historic lows at the point where refinancing will create billions of dollars in cash flow to homeowners. In addition, oil prices are dramatically lower, freeing up even more billions to consumers. The economy at 2.1% GDP is just great. “Not too hot, not too cold.” This rate should smooth out the economy so that the Federal Reserve does not have to get involved. Therefore, we look forward to a period of flat and constant interest rates throughout all of 2020.

Did you realize that for the first time in two decades manufacturing employment in the United States is actually on the upswing? Did you realize that illegal immigration from our southern border has virtually stopped in recent months due to changes the United States government has made in combination with the Mexican government? President Trump promised lower taxes, a higher economy, immigration control and bringing jobs back to America, and in only three years, he has succeeded in accomplishing all of these things. All things financially and domestically are very good at this time.

When you realize that the dividend rate on the S&P 500 is greater than the rate currently earned on the 10-year treasury, you realize the potential growth that stocks could have over the next decade. It is hard to fathom that investors would actually buy a 10-year treasury bond knowing that the rate of inflation currently exceeds the dividend rate. Therefore, if you buy a 10-year treasury at a rate lower than the rate of inflation, you are guaranteed a loss in purchasing power over that decade. Yet, every day, people make that conscious decision to lock in losses.

 Gorgeous sunset from my deck in Florida

Even though the deficits in the United States are extremely high, there is an interesting phenomenon going on in government finance. The Treasury is now starting to issue 20-year bonds and refinancing the government debt to much lower rates. While we have not addressed the issue of ballooning deficits in the economy, by locking in lower rates, they have reduced the negative effect of higher rates impacting the economy going forward. The government is doing a great job handling the debt of the economy for the betterment of its citizens. If we can reduce the overall cost of financing the deficit in the long-term, everyone benefits.

Yes, it is terrible that the U.S. government cannot finance its operations. It looks like we are going to have one trillion-dollar deficits for years to come. However, I do not fear the deficits as long as the GDP continues to grow. As long as the GDP will exceed the amount of national debt, we should be on solid financial ground, notwithstanding the deficits. Currently, the GDP and the deficit are approximately one to one. If the GDP continues to grow as anticipated, these debts should create no financial risk to the U.S. economy over the next few years since the GDP is growing faster than the debt – much faster.

Notwithstanding the almost-hysteria regarding the Coronavirus, business and the economy in the United States remain excellent. However, the highest growth rates in the world continue to be in Asia. I anticipate that as soon as the hysteria passes in China, they will meet their projected economic growth of 6% in 2020. Economies in Vietnam, Indonesia and Malaysia are exploding with industrial activity as many companies move out of China to other Asian cities. India is just now starting its growth. It is believed that GDP will exceed 5% growth in 2020 in the aggregate for all of Asia. When you compare that with 2.1% in the United States, you can see the fastest growth in the world is in those Asian coutries. Despite the negative downturn in the markets due to the economic impact of the fear of the Coronavirus, my opinion is that those markets will turn around quickly and will start to move higher as this hysteria passes.

As I look forward in 2020, with the known qualities that we know today, I cannot see how the market could not move higher. If we continue with a perceived growth rate of the GDP at 2% or greater for all of 2020, the earnings growth of the S&P 500 of 9%, and with a treasury yield below 2%, all of that adds up as truly positive momentum for the U.S. markets. As we move into spring and summer, it would not shock me to see that the GDP would actually improve and earnings could accelerate. Almost assuredly, these three strong economic predictors will force the stock market to a higher level in 2020.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins

Monday, January 6, 2020

Celebrating Our 40th Year Serving Clients And Thankful For One Of The Best Stock Markets Of All Time

From the Desk of Joe Rollins

In this posting I will reflect back on my first 40 years serving clients, and what I anticipate should be another upcoming good investment year. In 2019, we had one of the better stock markets of all time. The S&P 500 Index was up 31.5% and over the last ten years has averaged 13.6%; quite an outstanding performance. Over the last decade the S&P 500 Index is up 189.7%, and the Dow Jones Industrial Average is up 175.1%. If you look at the tech-heavy NASDAQ Composite, it was up almost twice those amounts at 366.9%. The gain in the Dow of 175% is the fourth-best decade in the last 100 years. By any definition, this last decade has been an unbelievably good run for investors. When I hear people talk about flipping houses and buying real estate in IRA’s and other exotic investment schemes, I almost laugh at how ludicrous that really is. Absolutely no asset class has outperformed stocks over the last decade. 

Partner Eddie Wilcox and his family in Tampa, FL

In this posting I would like to reflect back on our first 40 years and the great financial markets we had in 2019. As I always do in the first posting of a new year, I will give you my projection for the current year. Last year, I projected an S&P at 3,000, but the market was so strong in the fall I increased that threshold to 3,100. The market actually closed at 3,230.8, which was a few percentage points greater than my projection. If you compare those projections with so many other financial experts on the stock market, you will see that almost no one except me projected a stock market as strong as it ended up being.

I will cover all of those more interesting subjects later in this posting, but as I always do, let me give you the excellent results from 2019. The Standard & Poor’s Index of 500 stocks was up 31.5% for the year 2019. For the five year period it averaged 11.7% and was up 9.1% in the final quarter of the year. The Dow Jones Industrial Average ended the year up 25.3% and has averaged 12.6% over the last five years. In the final quarter of the year, it went up 6.7%. The NASDAQ Composite was the winner of all the indexes; up 36.7% for the year 2019 and averaged 14.9% for the five year period then ended. For the final quarter of 2019, it was up a sterling 12.4%. Outstanding performance for all three indexes.

As a comparison, the Barclay’s Aggregate Bond Index was up an excellent return in 2019 for a bond index at 8.5%. However, if you compare the numbers above, this index averaged only 3% per year over the last five years. In fact, in the last three months of 2019, that index barely broke even at 0.1%. I often comment on the lack of performance of bonds, and this was an excellent example of how stocks vastly outperformed bonds, even in the fabulous year of 2019. I anticipate bonds for 2020 to either be marginally profitable or negative for reasons I will explain later in this posting.

Eddie, Jennifer, Harper and Lucy Wilcox 
exploring Boone, NC

There are a lot of interesting subjects that we need to discuss in this posting, but I want to focus on the bad news that you received all year from the so-called expert forecasters. The economists told us that tariffs would create inflation and recession. Boy, were they wrong on that subject. The so-called experts that told us the inverted bond yield would almost surely create recession. Have you noticed that the inversion has moved in the opposite direction and, in fact, has steepened significantly in recent months? The so-called inverted bond yield was supposed to bring recession and send shock waves to the financial markets. As I commented here, this is only a temporary adjustment in interest rates and hardly means anything for the economy by itself. You have to consider all of the components of recession before you can draw a conclusion by only one indicator. The financial commentators on Wall Street did not bother to look at the other indicators.

As I reflect on the first 40 years of this Firm, it has been an interesting ride. I began in 1980 in the front room of my small house in Fairburn, Georgia. I only had one client at that time, and obviously, there was not a lot I could do for that one client in a given day. I often would call the telephone operator to make sure the phone was working since it clearly was not ringing with clients. I began teaching at Georgia State in the Master’s program of Taxation to occupy my time. I would always try to keep myself busy during the day, but inevitably at 4:00 pm I would end up watching MASH on TV. I think I have seen every episode of MASH multiple times, and every time, it tended to amuse me.

During those days, there was no financial news. It was very rare indeed that you even got a stock market update, much less any significant business news. I received The Wall Street Journal by mail, which often got to me two days after the fact. I would read The Wall Street Journal from cover to cover since I really had nothing else to do and I enjoyed learning about finance and business. Those were reflective years, but I did not even contemplate my future, given that I was a CPA and doing tax work. I never really thought about being in the investment world, but yet after 40 years I am still here.

The Schultz family enjoying Christmas break

The turn in my thinking came in 1987 with the horrendous stock market crash in October of that year. As you may recall, on Black Monday the market fell 22% in one day, dropping it all the way down to 1,720. Many asserted at that point that would be the last of the investing world since investors would flee the market and never return. Ironically, as we sit here today, the market is at 28,538, so those people that forecasted the gloom and doom in 1987 were clearly incorrect.

At that time, I would send my potential investment clients to various stockbrokers around town. What I found was that the industry was full of conflicts of interest, and they were doing a major disservice to my clients. Not only were they not interested in making my clients money, often times because of the high commissions and conflicts of interest with their investment groups, the clients lost money and quickly learned to despise the individuals behind the recommendations. Stockbrokers rarely made money in those days except for themselves and rarely clients.

At that time, I made the decision that it was time that I would invest clients’ money since I could hardly do no worse than what the brokers were doing, I had no conflicts of interest and only had the best interest of my clients’ futures. As I began to organize in late 1989 to open for business in 1990, I sent out a notice to my clients that if anyone would be interested in investing money that I had set up a company and would help them. To my amazement, checks started flowing in for clients’ investments. I had no staff at that time, no computer background or computer program to account for the money; just a desire to be helpful. That is where it all began in 1990, and who would have thought I would be here 40 years later?

Over the holidays, I had an opportunity to actually spend some time doing one of my favorite pastimes of reading books about business and the stock market. While I have read literally hundreds of books on investing and stock market performance, I was interested in going back and reading some of the books that told the stories of the disasters and what people did wrong. One of the books I read was When Genius Failed: The Rise and Fall of Long-Term Capital Management. This was a most interesting book on the rise and fall of Long-Term Capital Management. This was a group of PhD’s and scholars who thought they knew how interest rates would move and invested their clients’ money accordingly. In 1998, when Russia defaulted on their debts and the emerging markets imploded, their entire fund went to zero. The partners who had net worth in excess of $5 billion lost every dollar of it in five weeks.

Caroline and Reid playing with their balloons

Another book I read that was very interesting, was The Smartest Guys in The Room. This is a story of Enron and the accounting disaster that took a wonderful company basically to zero over a relatively short period of time. At the end of the day, the Enron story was one of fraud rather than business, but it was very interesting to see and hear the story play out of very rich people doing very wrong things to the detriment of investors. Very smart people did some very dumb things.

Another book that was quite interesting was Too Big To Fail, which was the story of the 2008 debacle that occurred on Wall Street and the housing crisis. It included every major Wall Street firm and almost imploded the financial markets and the American economy. What was truly interesting about this book was how the bankers had manipulated the markets to the detriment of investors and, along the way, destroyed housing throughout America. When bankers abuse clients, bad things happen. It was really bad in 2008

All three of these books were interesting, but were driven by one human frailty. All of the people involved in these incidents were seeking out personal enrichment to the detriment of investors. Greed is the underlying concept that ran through each of these interesting books. In many cases, it was outright fraud, but the larger picture was that they were trying to manipulate the markets in such a fashion to the detriment of investors to gain a little more wealth for themselves. Each of the principals involved were outrageously wealthy anyway, but their desire to gain more wealth destroyed the companies for which they worked.

I look back on those books and think about the interesting coincidence that happened. For the Long-Term Capital Management, they imploded in 1998 due to the wild fluctuation in the bond market. At that time, the market sold off and the world appeared to be heading in unison to recession and disaster. However, in the following year in 1999, the markets roared back with a dot.com phenomenon that forced the markets to unprecedented levels that they had never reached before. Long-Term Management was just a small blip in the world of investing that only took 12 months to recover. If you reflect back on the 2008 financial disaster on Wall Street, you have to reflect on the recovery that we have all enjoyed. On March 9, 2009, the S&P 500 Index closed at 666. Today, that same index is 3,230, up almost 400%.

Ava, Dakota, and 35-year clients 
Gerry and Allen Davidson in Florida

What I have learned from reading these books and watching financial markets is that you do not have to be a genius to understand equity pricing. What you really need to understand are the three basics that make stocks go higher. The most important component of any stock market valuation is interest rates. Today, we enjoy unprecedented low interest rates. In 1998, when Long-Term Capital imploded, they were shocked to find that the 30-year treasury had dropped to the unprecedented low level of 5.5%, the lowest it had ever been since the government started issuing 30-year bonds. Today, that 30-year treasury rate is 2.3% (60% lower). By any definition or any standard in valuating interest rates, we are enjoying the lowest rates ever in the history of American finance. That is great for stocks – bad for bonds.

The second component to stock valuation is the economy. The one absolutely undeniable factor that will make stocks go down is recession. If the economy is continuing to grow and people are employed, corporate America will do better and stock prices will rise. Today, we have an economy that is in a “goldilocks” environment. Not too hot, not too cold. The economy is growing nicely at above 2%, not overheating, and seems to be well under control by the Federal Reserve that is clearly watching and making the right moves for the economy. In addition, today we have more Americans working than ever in the history of American finance. The more people work, the more businesses are supported to better the economy. The secret of a good economy is keeping people working, and the fact that employers cannot find qualified employees is the best indicator you could ever have of a very strong economy.

The third component is corporate profits. Corporate profits continue to grow, and with the favorable income tax rate cuts of 2017, corporate earnings are now at record levels. Even today, they are forecasted to be higher in the year 2020 than they are in 2019. If you look at the estimated earnings for the coming years, you will see a gradual, but positive increase over the next three years.

Ava sitting with a giant light up reindeer
 at Tropicana Field 

I reflect back on the ‘90’s when the stock market was hot and cold and up and down, and interest rates were all over the board. I have often criticized then Federal Reserve Chairman Alan Greenspan and his control of the economy during that era. If you look back at the wild moves he made in interest rates that affected the markets, you also have to evaluate his desire that stock market derivatives be unregulated. Due to his desire to have more derivatives in the economy, we saw wild swings in the market that led to undisclosed liabilities by Wall Street banks of literally trillions of dollars. While the Federal Reserve could have stepped in and regulated the derivatives, since Alan Greenspan was an advocate of no regulation, he prevented any regulation from going forward. That proved to be a serious error of judgement in 2008.

Now, we have the economy in good shape, interest rates at low levels and corporate earnings going higher. Those that fear recession are not being realistic in their valuation. While there are many on Wall Street that say recession is a natural byproduct of the American economy, they clearly are mistaken. Did you realize that the decade that ended in 2019 was the only decade ever in the history of American finance that there was no recession? There is no reason to believe that recession is an inevitable outcome of any economy. Many factors lead to recession, none of which are currently present where we sit today. Those that are forecasting recession are assuming some huge geopolitical or military event. You cannot invest based on a presumption that something negative is going to happen because if you do, you will miss huge gains.

I often quote Peter Lynch, the famous fund manager of the Fidelity Magellan Fund. He has given us many words of wisdom about investing that we should all take advantage of. The one that rings true to me is his statement that the average investor does everything wrong. When they have a good stock that goes way up, they sell that stock to buy a stock that is going down. In fact, you should do the exact opposite. You should ride the good stock and sell the bad stock. Most people refuse to sell bad stocks because that would be an admission that they made a mistake. Since no one has access to your portfolio but you, why would anyone care how you feel? Ride the winner – dump the loser.

Markets are much the same. When the market is going up, it tends to go up until something prevents it from going up. The old saying on Wall Street is, “a trend is a trend until the trend is broken.” There is no presumption that markets will go down just because they have gone up a great deal. What makes markets go down are when the three factors above are violated. When you see interest rates progressively going higher because the economy is too hot, then the markets tend to fail. When you see the economy turn to recession, then almost assuredly the markets will go down. When you see corporate earnings start to fall throughout all segments of the largest companies, almost assuredly lower stock prices will follow.

We are fortunate today where none of those events are even remotely in the horizon. The economy is great, interest rates are low, corporate earnings are high and getting higher, and the Federal Reserve has a firm hold on the economy and is controlling it professionally. I see nothing but positives as I write this posting, which almost assuredly will lead to higher stock prices in the coming months.

Dakota, Ava, Santa, and Joe having a Merry Christmas

One of the best things that we have going for us in the year 2020 is that the Federal Reserve has indicated they intend to hold interest rates steady throughout all of 2020. As further encouragement, they indicated they would even cut interest rates, if necessary, to keep the economy accelerating. When it comes to stock market performance, such a commitment by the Federal Reserve is the most powerful statement of all.

Every year I project what the upcoming year should hold. I do not use this forum to come up with some wild prediction based on the changing of the moon or the length of women’s dresses. I actually think about this a great deal and attempt to make an estimate that is based on some sort of reasonable calculation. Hopefully I will be as close this year as I was last year.

The basic calculation of fair value of the market would be some sort of multiple of expected earnings as compared to interest rates. The 25-year average P/E ratio is 19.34. That means the market on average sells at 19 times projected earnings. Using this simple formula, you can actually calculate what you think the value of the market would be at the end of 2020. Currently, estimated earnings for 2020 are expected to be $180 per share. If you round up somewhat due to low interest rates to a multiple of 20, at the end of 2020 the S&P 500 should be at 3,600. Since the closing balance is at 3,230, that would be an increase of 370 points over the course of the year, or an 11% gain. If you add that to the dividend yield of approximately 2%, my formula would indicate that the market should go up 13% in 2020.

Those of you that are skeptical that a market could gain 13% in a year where it just finished up 30% are not much for studying history. Since 1950 when the S&P was up 20% or more in any one year, the following year has an 83% chance of a gain and that average gain is 11.2%. As you recall this year, the S&P was up over 30%. Even more interesting, if you have a year when the NASDAQ is up 30% or more, the following year is positive 78% of the time with an average gain of 14.2%. Most any reasonable investor would readily accept those odds of potential gains in 2020.

As mentioned previously, I am concerned about the valuation of bonds going into 2020. First off, the yield on bonds is certainly not very appealing. The current yield on the 10-Year Treasury, as of Friday, January 3, 2020, was 1.793%. Currently you can almost get the same interest rate on high-yield money market accounts as a ten-year bond. Therefore, if the bond stays steady throughout 2020, the gain you will make barely exceeds the no-risk cash balance. If, however, the bond would move up only marginally to 2.25% during the year, your gain would be totally wiped out, and you would be in a negative position. If you think that the bond cannot move to 2.25% this year, remember that in September 2018 (15 months ago), the 10-Year Treasury was yielding 3.25%. Therefore, it seems to me that the odds of making money in bonds in 2020 are extraordinarily small and a risk I would not be willing to take.

What I think will change in 2020, unlike the last five or six years, is that the international markets will likely outperform the U.S. market. Not that their economy is better or that things are more robust in Europe or Asia, but rather that they have lagged so far behind the U.S. for so long that surely their day in the sun is coming.

There it is; my simple projection for 2020. I project the S&P will end the year at 3,600, that bonds will make little or no money in 2020, and that there is a high likelihood that international markets will outperform U.S. markets. Simple and sweet, but the same basic concept. Equities will continue to be the best performing asset class of them all in the coming decade.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins

Wednesday, December 18, 2019

Happy Holidays!

In celebration of the Christmas holiday, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, December 23rd through Wednesday, December 25th. Our regular office hours will resume on Thursday, December 26th.

AND, in celebration of the New Year holiday, our offices will be closed on Wednesday, January 1st. We will resume normal office hours on Thursday, January 2nd.


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

You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com, Robby Schultz at rschultz@rollinsfinancial.com or Danielle Van Lear at dvanlear@rollinsfinancial.com.

The Partners at Rollins Financial and Rollins & Van Lear wish you a Wonderful Holiday and a very Happy New Year!

Best Personal Regards,
Rollins Financial, Inc.

Tuesday, December 10, 2019

Happy Holidays and Giving Thanks For a Great Investment Year

From the Desk of Joe Rollins

We are closing in on the end of one of the best investment years of the decade. We are now enjoying one of the best economies of all time in the U.S. with unemployment at a 50-year low. We have seen the GDP in the United States hold up and more Americans are working now than have ever worked in the history of America. It is just hard to believe that when you watch the nightly news that they are even talking about the same country as the facts unfold. I will try to cover all of these subjects in this posting and hopefully provide some clarification for you. ‘Tis the season to be thankful.

Ava with a sand structure
in Treasure Island, Florida

When the first tariffs were proposed by President Trump in January of 2018, the so-called experts forecasted runaway inflation, a decline in GDP, and a wholesale lay-off of employees in American manufacturing. How could they have been so clearly wrong and yet so sure of their projections? As we close the two years of 2018 and 2019, none of those horrible economic events actually occurred. In fact, the economy continues to be strong, unemployment continues to be on the upswing and the financial markets have reflected positive trends in both of those years. As I told you in my writings that none of this would actually occur, I feel some level of gratitude that my projections were better than theirs.

I have a lot of topics to discuss in this posting. I want to talk briefly about the political atmosphere as we see it in America today and the economic effects of the proposals of the candidates running for the highest office in the country. I want to discuss the change in equity investing and what has happened over the last 10 years with the classic textbook 60/40 equity bond mix. However, before I can begin all of that truly exciting information, I want to cover the excellent financial results of November 2019.

The Standard and Poor’s Index of 500 stocks had a very excellent month in November where they were up 3.6%. For the year then ended November 30th, that index is up 27.6% and for the 10 year period then ended is up 13.4%. The Dow Jones Industrial Average also had an excellent month in November of 4.1% and year-to-date is up 23%. The 10 year average on that index is 13.3%. The NASDAQ Composite was the star performer during November, up 4.6% and is up a sterling 31.9% for the year 2019. It also leads the 10 year average index up 16.3% per year over the last decade. In order to form a comparison, the Barclay’s Aggregate Bond Index was exactly zero for November, up 8.7% for the year 2019 and has averaged 3.5% over the last decade on an annual basis. This information is what I will relay later as a change in thinking regarding equity/bond investing. As you can tell, the Barclay’s Aggregate Bond Index was up 3.5% while the three largest indexes were up high multiple digits. For a basis of comparison, bond investing has been pretty much a loser over the last decade. While the bonds have done well in 2019, up 8.7% for the year, you will note that over the last three months, even though interest rates have been cut by the Federal Reserve during that time frame, the Aggregate Bond Index is actual -0.4% over the last three months. As a comparison, over the last three months the S&P 500 has been 7.9%, the Dow Jones Industrial Average up 6.9%, and the NASDAQ Composite up 9.1%.

You do not have to have a long memory to recall that during the summer of 2019 all the so-called economic experts were projecting recession and a swift downfall in the stock market leading into the fall. The exact opposite has actually occurred. The economy has actually strengthened and would appear to be, while not rip-roaring hot, quite satisfactory at a 2.1% increase in GDP for the third quarter of 2019. As I have often mentioned in these writings, you do not want the economy too hot which would force the Federal Reserve to increase interest rates, nor too low which would stall the economy and throw the country into recession. You want the economy to be in the 2%-3% GDP increase, which is the “Goldilocks Economy”, not too hot, not too cold. That is exactly where we are today.

On Friday of this week, the Department of Congress announced a huge increase in employment during the month of November. The increase was so large it took all of the so-called experts by surprise. In fact, actual numbers were over 100,000 greater than the projections for the month and to add to better news the prior months were also revised higher. In addition, unemployment dropped to 3.5%, which is, of course, the lowest in the United States since 1969; a 50 year period. In addition, wages were announced to be up 3.1% year-over-year and job participation was announced as the highest level ever since they started keeping the index. While it is true that GDP in the United States has decreased from the 2.9% for all of 2018 to the 2.1% rate in the third quarter of 2019, I argue that is a positive move. Recall in 2018 when the Federal Reserve increased interest rates three times, which led to a selloff in stocks in the fourth quarter of 2018. This year they have cut interest rates three times which leads to higher liquidity in the economy and higher stock prices. In addition, we are seeing positive attributes throughout the economy. For months you have been reading about the collapse in the manufacturing environment in the United States, and it is true that manufacturing has softened. However, despite the projections that manufacturing would fall off a cliff due to the tariffs, it has in fact has stayed in the expansionary percentage. The employment report indicated that factory jobs were actually up 0.6% in the month of November which caught most so-called experts off guard. While manufacturing has slowed down, the fact that workers continue to find new work tells you that it is not impacting the economy. More Americans are working.

Partner Robby Schultz with 30-year client Mary Trupo

One key prior indicator of an upcoming recession relates to the increase in the price of oil. Virtually all of the recessions since the 1950’s have been created by a rapid increase in the price of oil. I vividly recall waiting in line to buy gasoline when I first came to Atlanta in the early 1970’s. In fact, many times you would wait in line and when you finally made your way to the pump there was no gas to be bought at any price. At that time the United States was importing virtually all of its oil from the Middle East since it was so cheap as compared to the United States. Of course, this was a flawed philosophy given that we became dependent on imported oil and when the Middle East shut down oil sales to the United States due to war, the United States suffered dramatically. This led to a recession in the United States that slowed growth for almost a decade. Many of you recall the double-digit inflation we had during the Carter Administration which was mostly due to higher oil prices. Inflation did not break until 1982, and then the economy exploded.

So, what we are seeing today is that the United States is almost self-sufficient in oil. Due to technology and the innovation of new oil drilling techniques, the United States only imports some oil from the Middle East and is actually now exporting oil to the rest of the world. Last week OPEC announced something that we all knew was true. They realized that they cannot compete with high oil prices and announced that they would further decrease their prices in order to stimulate demand for their products. But in reality that has created a vast diverse supply of oil throughout the world, keeping prices down. It was announced recently that the oil rich Permian Basin oil fields in west Texas are actually laying off employees. This region produces 14% of all the oil produced in the United States and the fact that they are laying off employees tells you that there is not enough demand or that the price is too low. This one fact alone should stimulate the economy as virtually every segment uses oil in some fashion which will keep prices down for several years, preventing any shock to the economy for higher prices. This is very good.

Just as I have itemized the positive attributes of the economy today, I am amazed that the current political environment promotes the people who believe the economy needs an overhaul and are proposing vast changes. If you analyze all of the politicians running for the highest office in the country, you will find one overwhelming consistent policy proposal. Each and every one of them seems to be proposing higher income taxes, one way or another, on virtually everything in the economy.

At the end of 2017, Congress passed a lower corporate tax rate, which made U.S. corporations more competitive in the world. By cutting the corporate income tax rate from 35% to 21%, corporations now enjoy competitive tax rates. Corporations were encouraged to come to the United States to do business by virtue of having a lower tax rate, but all of the politicians running for the highest office will propose increasing the rate that has helped so many American corporations.

37-year clients Roger and Linda Moffat on his 70th birthday

While everyone would like to have a better health system that is more affordable, none of the proposals to date seem to be economically feasible. A Medicare-for-all would cost trillions of dollars over the next decade. I have seen no proposals that would even come close to funding that expenditure. 80% of the U.S. population has insurance today, with the majority being satisfied with that coverage even though it is too expensive. In my opinion, to basically scrap 80% of the population’s insurance rather than focus on helping the other 20% is almost ludicrous in its implementation.

I look at countries like Argentina and Venezuela, which have basic socialistic concepts, to understand how silly a move to the left in the United States would be. The inflation in Argentina borders on 40% annualized. The GDP for last year was -27%. The only way they can compete in international commerce is by devaluing their currency, creating extraordinary inflation in their own country. Venezuela is even worse, where it is projected that their inflation may be as high as 10,000% in 2019. Everyone knows that Venezuela is on the verge of collapse and yet the people of Venezuela cannot change their government by political vote. We have all seen the shortages of food and common household items throughout Argentina and Venezuela, much of it caused by undemocratic economic policies.

As I have often said, I do not watch the news on a regular basis since I find the reporting to basically be social comment and not news. I long for the days of Walter Cronkite, who would come on and read the news and just tell me the facts. I have no desire to know the political leanings of the commentator since I feel qualified to make that determination on my own. But when I do watch the news, I am completely flabbergasted at the inaccuracy of the stories being reported. All you have to do is read Yahoo any day and know the 20 or 30 lead articles.

I am also amused at the current impeachment hearings going on in Congress. Since there is absolutely zero chance that the President would be convicted in the Senate, the democratic hearings border on ludicrous. The way I see it, the intent is to gain facetime on TV, which would appear from all rating results that most Americans really do not care. As for the facts backing up the proposed charges of impeachment, I am somewhat confused by the lack of seriousness of the charges.

Ken and Una Dooley's grandchildren: 37-year clients, 14 parents, and 19 grandchildren

First off, I have never been much of a fan to use U.S. taxpayers to support governments that could easily support themselves. The fact that we are giving the Ukraine $400,000,000 should raise the first concern. However, if, in the better judgement of Congress and the President, we elect to give them any money whatsoever, I would demand and expect my President to insist that the government getting that money should have a full-blown study of corruption. The fact that we would knowingly give any country money to support a government that was a hotbed for corruption would appear to me to be a dereliction of duty. If, however, there is an impeachment vote, as there is likely to be one in the House, the trial in the Senate will be a farce that this country will regret for generations. What is even more fascinating to me is that for a country where we are having the best economic years in generations and more Americans are working than ever in the history of American finance, we are seeking to remove the President while the economy is so good.

When I was in school, as well as when I first got into financial counseling there were certain standards in the financial world that were above reproach. These assumptions were that you would always have a diversified portfolio of some stocks and bonds - higher towards stocks as you were younger and more towards bonds as you got older. The golden rule, so to speak, was that whatever your age was would be invested percentage-wise in bonds and the balance in stock. The older you got, the higher the percentage in bonds. In fact, I hear virtually every day of my financial life someone quoting that preamble to being above reproach and not even subject to conversation. For the last decade I have been saying that this concept was an error and fortunately, I have been correct.

Recently, Bank of America/ Merrill Lynch came out with a pronouncement that rocked the financial community. Basically, the headline said that the 60/40 rule was no longer relevant and is incorrect. What a high level of heresy when one of the largest brokerage houses in the world proclaims a financial concept, rigid and set in stone, to be inaccurate for the next decade. This is exactly what I have been explaining to my clients for a decade, but to have Merrill Lynch actually promote and encourage my thinking was fulfilling. However, to the rest of the financial community, outrage was everywhere and proclamations that they must surely be wrong were widely printed.

The Dooley grandchildren

As I pointed out when I read the statistics for the last 10 years, the performance of the three major indexes was around four times as high as the performance for the aggregate bond index. To give up that level of performance has hurt many portfolios over the last decade and I suspect, in many cases, has led to sub-standard performances on a year-over-year basis. But where do we stand today?

As I write this, the 10-year treasury is at 1.8% at the current time. My projection for 2020 is that same index will go up to 2.3% sometime in 2020 due to a strengthening economy. I had projected for the end of 2019, a stock market of 3,000, which I later increased to 3,100. Today we are above those thresholds, but I once again project a stock market increase in 2020 of 10%. So, if my projections are correct, the bond market will lose money in 2020 and the stock market will increase in value.

My opinion is that you can never make the assumption that any allocation of stocks and bonds is relevant unless you take into consideration current economic environment. While over time ratios may prove to be better, it would seem that economic circumstances could change from year-to-year. At the current time, an over-allocation of bonds or a 60/40 asset allocation almost assures an underperformance in your portfolio.

As we close the year after great financial returns in 2019, I think it is time that each reader of this posting considers their own personal financial circumstances. You would absolutely be shocked to know how many young couples I meet that have children but do not have a will to take care of that child under their simultaneous death. I bet that more than 50% of the readers of this posting do not even have a current will, a Healthcare Directive in their state or a financial Power of Attorney. People do not think they are ever going to die so they never seem to get around to handling those very important legal documents.
I do not know any young couples that do not need life insurance for the care of their children. Term life insurance is so outrageously inexpensive and I do not know anyone who does not need it. I am not talking about expensive whole life insurance which is, contrary to the industry’s belief, not an investment but merely an insurance product. Yet, so many people only have life insurance provided by their employer. As is obviously the case, if you get sick and lose your job, you lose your insurance. If you change jobs, you lose your insurance. Everyone under the age of 60 should have a personal term life insurance policy to protect their family in the case of their death. I am willing to bet that most people reading this posting do not.

A few years ago, we saw a case where a client who had never gotten around to updating his IRA beneficiary died unexpectedly. I am sure you can imagine how upset his current wife was to find out that his ex-wife was still listed as the beneficiary. Many people probably do not even know who the current beneficiaries of their 401(k), IRA’s and life insurance are. It only takes a second to confirm the beneficiary, yet most people do not do it. We saw the other day a case of someone who had named a Trust as the beneficiary. Unfortunately, the Trust never existed. It is a simple and very common process to name your spouse as the beneficiary, and your children as contingents. Yet, the vast majority of accounts we take over do not have any contingent beneficiary designations on file. As we close this great year, check these for yourself.

Since they changed the laws, virtually no one falls under the Estate law. Therefore, it is imperative that you work hard to eliminate probate in the case of an early death. As an example, a husband and wife may have taxable accounts in their individual or joint names. For any account that is in an individual name, probate will be required. While I understand someone may have a reason to keep certain financial assets in their individual name, they can always put a “transfer on death” designation on the account and accomplish the same goal of avoiding probate. Your house(s) should also be in joint names if you have a long-term marriage. Basically, you want everything to pass from one spouse to another at death without probate. Every day we see where clients have multiple checking and savings accounts in their individual names and in some cases, ones that their spouses are not even aware of. We see assets strung over five or six different brokers, banks, etc. and yet many times the spouse is not even aware of their whereabouts. We highly recommend you do your best to minimize the number of accounts you maintain as well as their locations, and ensure that all are set up in a way that avoids probate.

The Rollins family sleighing into the holidays!-
Josh, Joe, Ava, Dakota and Carter

As we close out this year, which has been quite profitable from an investment standpoint, I hope that you look into the simple items above. As you have time off for the holidays, review all of your legal documents, beneficiary designations and life insurance needs. While we sell absolutely zero products, I am a registered life insurance professional and can advise on where you can buy it commission-free. We can also help you with your beneficiaries and give you advice and referrals for people to draw up legal documents. Do not let another year go by without reviewing these simple financial requirements for the future. It is very important.

We hope all of your families have a joyful holiday season and we look forward to meeting with you at any time regarding your financial needs. I see so much money uninvested nowadays, and to think that the S&P made 20+% returns this year and you have cash sitting in a money market making less than 1%. Wow!

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins

Monday, November 25, 2019

Happy Thanksgiving!

In observance of Thanksgiving, the offices of Rollins Financial and Rollins & Van Lear will be closed on Thursday, November 28th and Friday, November 29th. We will re-open for business on Monday, December 2nd at 8:30 a.m.


If you have any pressing matters that require immediate attention on Thursday or Friday, please do not hesitate to contact any of our staff.

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Tuesday, November 5, 2019

DMV to administer your health plan, that sounds like a good idea - not!

From the Desk of Joe Rollins

The month of October 2019 turned out to be quite an extraordinarily good month for investors. Even though the “news of the day” was, in a word, discouraging, the economy and the financial markets continue to move higher. I am sure that the impact of all the negative news and political strife we find ourselves in today has a psychological effect on investors. While it should not, it is human nature to assume the worst. I have to admit, after watching the evening national news you certainly would believe the world is on the brink of destruction. Who could be encouraged after hearing all of the negative reports?

Consistently over the last year I have been telling you that the economy continues to be strong and the controversy related to tariffs would mean absolutely nothing. Even though the financial press has tried to convince you that recession was inevitable in 2019, the economic facts never supported that conclusion. I wish I could explain to viewers of the financial press that the people that speak frequently on these shows have implied biases. It is not hard to determine these biases, but so many people believe the words without reviewing the background of the speaker. Hopefully, I can provide some facts that support my position in the following commentary. However, before I can jump into this enlightened conversation, I have to report the results of the month of October.

Jennifer, Lucy, Harper, and Eddie Wilcox in New York City

For the month of October 2019, the Standard & Poor’s Index of 500 stocks was up 2.2% for the month. That index is up 23.2% for the year 2019, and over the last five years has averaged 10.8% per year. You may recall that I forecasted a year-end S&P 500 Index value of 3,100. Today, that index is at 3,037.6 and is moving in the correct direction for a year-end rally.

The NASDAQ Composite Index was the real winner of the month, up 3.7% in October. That index is up 26.1% for the year 2019 and has averaged 13.6% per year over the last five years. The Dow Jones Industrial Average was up 0.6% for the month of October and is up 18.2% for 2019. Over the last five years, that index has averaged 11.9% per annum. For purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.3% for the month of October 2019 and is up 9.2% for the year 2019. For bond investors this has been an extraordinarily good month, but the five-year average on this index is only 3.6%. As you can tell from the above numbers, the three major market indexes all have averaged double digit returns over the last five years. However, the Barclay’s Aggregate Bond Index has only averaged 3.6% and, therefore, is roughly one-third of the major market indexes total returns.

It seems like for the last six or seven months, the financial press has screamed at the top of their lungs about the worldwide slowdown and the recession coming to the United States. Earlier this week, the unemployment announcements for the month of October seemed to belie all of this hysteria. Once again, the U.S. economy added new jobs during the month of October. Even though the so-called experts were only expecting modest growth with the General Motors Strike, the economy continued to be strong. The jobless rate ticked up a tenth of a percentage point from 3.5% to 3.6% during October, but you must recall that the rate of 3.5% was the lowest in this country over the last 50 years. Not only were the October numbers a surprise, the Department of Labor increased the number of workers for both September and August. How anyone under any definition can view these positive employment numbers as negative certainly belies all facts.

As I have mentioned so many times in these commentaries, the secret for the economy to remain strong is to keep people working. We also need to control the economy in a positive, but steady manner. While everyone likes a robust economy, that certainly is not what is best for investors. Stability is much more important than robust gains and losses.

Also, during the last week of October, the Federal Reserve announced a third cut to the Federal funds rate by 0.25% of 1%. What is most important about this rate cut is that the Federal Reserve is being preemptive in allowing the economy to slow down. What we all want is a U.S. economy that is growing at a stable but slower rate. If the growth rate turns negative, they will cut again.

I was asked recently what the difference would be between the 4th quarter of 2018 when the market sold off 20%, and the 4th quarter of 2019. I am often confronted by people who only compare the year’s previous numbers without understanding the external forces that control the marketplace. In the 4th quarter of 2018, the Federal Reserve announced that they would be increasing interest rates at least three or four times over the coming year. Also, the Federal Reserve has announced that they would be restricting the economy by allowing the bonds held by the Federal Reserve to run off and be redeemed, therefore, taking liquidity out of the economy. Contrast that to 2019 when the Federal Reserve announced that they have cut interest rates for the third time and would be willing to cut interest rates even further if the economy were to slow down at some point in the future. Basically, the difference is that of an accommodating Federal Reserve in 2019 and a tight policy Federal Reserve in 2018. When you evaluate stocks and bonds, the difference in those two scenarios is substantial.

I am probably one of the few people who actually read the economics and statistics on the back of Barron’s. I have been watching them for the last several months and I may have discovered something that the national financial media does not want you to know. It looks to me like the economy and its most vulnerable sector, manufacturing, have actually bottomed out. This seems to have a stabilizing effect on manufacturing as the economy continues to pick up in other sectors. Service sectors are extraordinarily strong, but manufacturing has been weak. I am forecasting now that contrary to an economy that is ready to turn down, it looks to me that this economy is actually ready to turn up. If I am reading the charts correctly, beginning in the second quarter of 2020 we should see an economy starting to grow again, as compared to an economy that is falling off a cliff as the financial news would want you to believe.

Also, it appears that the financial markets are telling us the same thing. Some of the European markets have turned around and are performing admirably. With all that has been said about the Chinese market, their year-to-date returns have been equal to the U.S., or better. As we have often addressed in these pages, the markets are predictors of the future. These markets would not be turning up if the underlying economy in these countries was turning down.



Caroline was a Georgia cheerleader, Reid was Spiderman, and Ava was a policewoman for Halloween 2019

In January 2018, the President announced his first major tariff announcement. As we are all aware, the markets went crazy during that cycle as each and every economist appeared on television to explain the world would surely end with the President’s tariffs. As they explained, these tariffs would quickly lead to recession in the United States, make inflation go up exponentially over the next few years and would create total havoc in the world’s economy. Absolutely nothing even similar to that has actually occurred. As I explained to you at the time, tariffs were such an insignificant part of the U.S. economy that surely such a minutiae could not possibly have had any type of material effect on the U.S. economy. It looks like that proved to be exactly the case. We were right – they were wrong.

What about inflation? We do not even have enough inflation in the United States to register the Federal Reserve’s mandate of 2%. So, my opinion is that the economists are either reading from textbooks that are out of date, or maybe they are just on television making an extreme position to get their names in the press. It is fairly clear now that the tariffs have had no material impact on the U.S. economy over the last two years. Only one person was the source of reasonable judgement in this matter. You are welcome.

These so-called experts were screaming at the top of their lungs that we were going to see an earnings recession sooner rather than later. Year-over-year earnings would completely evaporate and this would forecast the upcoming recession. As we are mostly through the reporting season for the third quarter earnings in 2019, the truth of the matter is that the earnings are almost flat year-over-year. No earnings recession has been noted by any of the major companies. What is even more bewildering is that fourth quarter earnings are now forecasted to be up close to 8% over the prior year. So, there is no major negative earnings announcements and, in summary, the financial markets could not be in a better place.

The best period of time for stock market performance is November through April. The average return during this time period is 6.62% and the market tends to be positive over 76% of the time. If you look at a chart of all of the time periods when the market performs well, this by far is the best.

So basically, we have a period where earnings are trending higher, interest rates are moving lower and the economy is stable. The most important characteristic of the economy is its stability. Not too hot, not too cold; the “Goldilocks” economy. Stable and just right. There is no reason to assume that over the next six months the economy will not continue to be stable. With lower interest rates, stable earnings and a stable economy there, is a high likelihood that the markets will continue to go higher.

Partner, Eddie Wilcox, and his family 
in front of the Statue of Liberty

It looks like at the current time, with the political environment that we live in today, we may very likely have a democratic socialist candidate running against the current President. Every time I hear a candidate speech, I just want to ask them to illustrate exactly where such an economic concept has been successful. We know it has not been successful in Russia, Cuba, Venezuela, and to a lesser degree, Argentina. Certainly, China is not a socialistic economy even though it is run by Socialists. While certainly Sweden, Denmark and Norway have their socialistic economy concepts, these are relatively small economies in the world and hardly compare with the largest economy in the world.

One of the most striking examples of this concept is “Medicare for All”. This would eliminate private health insurance plans and turn over the medical healthcare in America to the government. This is one of the standard principles of socialists. They want the government to do more in your everyday life, not less. In my opinion, the government does virtually nothing better than the private sector except national defense. So basically, all of private insurance as we know it today would be eliminated and the government would be in charge of your healthcare for the remainder of our lifetime.

It is projected that if all of the insurance companies are eliminated, over 2 million Americans would be put out of work. Just as well as the Obamacare website worked five years ago, can you imagine the government, so inefficient that they could only handle the few million people covered under the Obamacare Act, covering medical insurance for everyone in America? Just envision your local DMV with their superior intellect and ability to function properly being responsible for your healthcare. Truly a scary concept that would be. They could not even handle the 13 million people on Obamacare, what are they going to do with 300 million? You know the answer.

The Wilcox girls in Central Park

And how would we all pay for this wonderful healthcare concept? Essentially, corporations in America would pay a fee to the government for this healthcare and presumably this would be in lieu of private insurance. As all of you will suspect with the efficiency of the government, this fee would almost surely rise year-over-year. Even though private insurance provided by employers is extraordinarily well-approved by employees covered by it, all of that would be ripped out of the hands of private insurers and turned over to the government for the future. I am not exactly sure who thought this was a good idea, but clearly I am not one of them. It would seem to me that if, as the polls tell us, 80% of the population that is covered by health insurance is happy with it, since this perceived Medicare for all is going to cost $52 trillion over the next decade, it might be cheaper to buy all of the uninsured a policy from a qualified insurance company.

The other concept that is clearly advocated is to tax the super wealthy. That concept only affects a relatively small part of the population and certainly people that are not super rich would support a higher tax on the wealthy. Recently, France also instituted a tax on the extraordinarily wealthy. Has anyone ever looked at the effect that this tax had on the economy?

According to Barron’s, “ √Čric Pichet, a professor at Kedge business school in France, estimates that the now-repealed French wealth tax raised 3.6 billion euros ($4.01 billion) a year, but cost the nation’s economy some €7 billion annually in fraud and shrinkage of the tax base.” Obviously, when they announced that the French citizens would be paying the higher tax, wealthy taxpayers escaped to countries with lower taxes such as Switzerland. What they found out was that the biggest problem in administering the wealth tax in Europe was to value the assets. The U.S. would have exactly the same issue with valuation. Exactly how much would your business be worth if you were required to value it in a wealth tax? Do you think your personal home would be at the high level of valuation or at some lesser, liquidated value? Conceptually, fair market value is a moving target and either could be correct.

There is no question that the cost of administering a wealth tax would create daunting problems for an already overworked and undereducated Internal Revenue Service. To think that the wealth tax could collect anywhere close to the projections by these candidates is almost as illusionary as the candidates who believe that the government is more efficient than the private sector. The other mistake these candidates are making lies within their perceptions. The major problems in America to them are the ones that are not so problematic to most Americans.

If 80% of the population with company-sponsored medical plans is happy, why blow up the whole system to support the 20% that are unhappy? And to think that the U.S. government could administer any type of medical plan borders on the hysterically uninformed. I guess it does not hurt to take extreme positions, but I can assure you that if they believe the politics on the East and West Coasts agree with the politics in the interior of the country, they are woefully uninformed.

Ford Smith with his painting at my house

For some reason, people tend to enjoy the personal accounts that I have of things that have happened in my 70 years. Therefore, I thought I would relay the time I actually ran across former President Clinton playing golf. In 2004, I was enjoying a round of golf on the famous “Blue Monster” golf course at Doral Country Club in Miami. Ironic as it is true, those golf courses are now owned by current President Trump.

As we were rounding the 13th hole, the drink cart girl informed us that she no longer had any vodka as the President had used up the last of it. I was excited to hear that then-president George Bush might be playing golf in front of us. She quickly corrected me to inform me that it was not President Bush, but rather former President Clinton. I was certainly excited to have the opportunity to meet him but did not want to interrupt his game. I did, however, think it would be neat to at least catch a view of him. It was almost hysterical to see the security guards riding around in golf carts in their dark suits and sunglasses. Obviously, they did not seem to be very hospitable and certainly I had no intention of disturbing the President’s game.

As the day grew darker, along with the influence of some form of alcohol other than vodka, my courage increased. Eventually, I just drove my cart right up to the President’s cart thinking, what could they possibly do to me on the golf course? He was smoking a cigar and I have to admit that former President Clinton was as nice and sociable as he could possibly be. He took the time to sign the score book I had with me that day and even made a point of going down and shaking hands with the guys raking the sand traps.

President Clinton at the Blue Monster golf course

It was quite an interesting and memorable evening. It made me recall when President Clinton initially won in 1992, how the media called him fat, overweight, etc.. My personal impression having met him was he was significantly smaller than I am and certainly not as broad. Either he had lost a lot of weight since the presidency, or those accounts, like so many other things with the media, were misplaced.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins