Tuesday, October 8, 2019

My Long History with the Atlanta Braves

From the Desk of Joe Rollins

There is not a great deal of new information to report for the month of September 2019. Although the markets were extremely volatile during the month of September, the upward trend remains intact. It seems like every headline was filled with someone or another forecasting a recession just around the corner. Also, the headlines were full of political news due to the upcoming 2020 Presidential election. While presidential elections should, in my opinion, have absolutely no impact on financial markets, they almost always do.

Since there was not a whole lot going on financially, I would like to relay my history with the Atlanta Braves. The Atlanta Braves are currently in the playoffs and at this writing no one knows what the outcome will be. However, I became a season ticket holder in 1989, so this marks the 30th year of my participation. Over that time, as you will read later on, there have been many ups and downs throughout my attendance.

Ava's first baseball game

Before I get to the more interesting part of this posting, I must report the financial results for the month of September. For the month of September, the Standard & Poor’s Index of 500 stocks was up 1.9% for the month. For the year 2018 through September, that index is up 20.6% and the three-year performance is 13.4% and the ten-year performance is 13.2% annually. The NASDAQ Composite was barely positive, up 0.5% for the month, up 21.5% for the year 2019 and up 15.9% three-year period then ended at a 15.5% for the 10 year annual returns. The Dow Jones Industrial Average was the winner for the month at 2.1% and that index is up 17.5% for the year, 16.4% for the three-year period and 13.6% for the 10 year period. Just to form a comparison, the Barclay’s Aggregate Bond Index was down 0.6% for the month, but is up nicely for the year 2019 at 8.4%. For the three-year average it is up 2.9% and for the 10 year average it is up 3.7%. Even though bonds are having a very respectable 2019, the ten-year returns are roughly one-third of what any of the major market indexes reflect.

One of the most important components of understanding gross national product (GNP) in the United States is to realize how it is calculated. Over the last three decades the U.S. economy has shifted from a factory environment to more service-oriented. As a matter of fact, the service index greatly outweighs the manufacturing index, and more importantly, consumption or consumers themselves represent roughly two thirds of the calculation of the GDP. It seems that the U.S. was perfectly willing in the 70’s and 80’s to allow manufacturing to lead the United States overseas. China was the major benefactor of that transfer of manufacturing and since they had more favorable labor rates than the U.S., the U.S. government was perfectly willing to take that over. Now we want it back!

There is no question that the U.S. is dominant when it comes to services, and certainly dominant when it comes to technology formation, but the real challenge is trying to determine without manufacturing exactly which way the economy is going. The last several months we have seen major swings in the equity markets based on assumptions from others that the economy is either moving ahead or moving down. As I have pointed out in these writings before, the most important component by far in calculating the trend of the market is the number of actual people working. If you have a job and you support your family, you will consume. You will pay for food, transportation, and even some entertainment. The more people working the more people will add to the economy. The most important function that any government can do is to keep American workers at their jobs. It seems 2019 will be a record in every regard when it comes to employment.

Josh and Carter Roberts are engaged!
Wedding plans are underway for next

On Friday, the government announced that the jobless rate in the United States had reached 3.5%, which is the lowest unemployment rate in this country in 50 years. Just let that information sink in for a second. There are more people working in the United States now than ever in its history. Yes, the unemployment rate was lower previously, but the number of Americans has increased dramatically over the last 50 years and now more people are working than have ever worked in this country before. Given the outrageous political exclamations that you see on the news every day, do you not find it comforting that so many people now have jobs and employers are actually seeking more employees than are available?

You really have to read a report on the unemployment rate to understand how wonderful the news was. In this report for September, the unemployment for workers with less than high school diplomas dropped to 4.8%. Think about that just for a second; workers below college level now reach a rate of 4.8%, which by definition is below the perceived full-employment rate of 5%. Even more good news was that joblessness among Hispanic men declined to 3%. This level of unemployment by Hispanic men was the best on record tracing back to 2003. Therefore, the number of employed with less than a high school diploma is the best that has ever occurred since 1992, when the labor department first began reporting this index. The Hispanic rate is the best since 2003.

One of the true indicators of a good economy is how broad the employment was. So many politicians argue that the workforce is tilted toward the rich and not the everyday workers. As you can see from this employment report, employment is strong throughout the workforce, including Hispanic workers and the less educated.

I guess I get somewhat weary about discussing the economy when you see such tremendous coverage given to unimportant economic facts. Just last month we were awakened to the realization that Iran had used drones to bomb the refining manufacturing plant in Saudi Arabia. Suddenly, the price of oil jumped up 10% despite the U.S. buying virtually no oil from Saudi Arabia. As the price of oil went higher, the equity markets went lower under the fear that the U.S. would initiate war with Iran. Many of the forecasters on television espoused the military prowess of Iran without bothering to check the facts. Surely, if the United States would enter into a prolonged war with Iran the price of oil would double, and the economic effects would be crippling.

First off, we do not buy oil from Iran, nor have we for decades. Secondly, our consumption of oil from Saudi Arabia is very low. But most importantly, the Iranian army is not much of a threat. They barely have an Air Force that flies and few Navy armaments. Do you realize that the economy of Iran is not even as big as the GDP of the state of Georgia? During this month, I heard a military assessment of the Iranian military indicating that it would take maybe one full week to take out all of their military installations. But none of us want war with anybody, including Iran. Their economy is in complete disarray, they are controlled by a dictator and their own people hate their government. Isn’t it interesting that everyone wants to come to the United States, but hate us so much?

Partner Danielle Van Lear with
Josef Martinez of Atlanta United

I read an article this month about the nuclear financial bomb that the Chinese could deploy against the United States. Not a nuclear bomb in the form of nuclear energy, but a nuclear bomb in the form of debts. Several prognosticators say that if China really wanted to hurt the United States that they could just drop all of their U.S. Treasury holdings in one fell swoop, destroying the U.S. economy in the process. Once again, do these people even do any research?

Yes, it is true that the Chinese hold roughly $1 trillion in U.S. Treasury Bonds, but do not forget that there is currently $22 trillion in U.S. government debt outstanding and, actually Japan holds more than China at a little over $1 trillion. However, 70% of the U.S. Treasury debt outstanding is actually held by the U.S. government itself. For many years the Social Security system has bought treasury bonds with its excess Social Security payments that it receives through tax withholdings. So, even if China were to sell all of their bonds in one sitting, it would hardly affect the price of U.S. Treasuries given that it represents only 4% of total outstanding bonds. Further, the Chinese realize that selling these treasury bonds would create a huge swing in their currency by strengthening it by virtue of selling U.S. dollars and buying local currency. The last thing the Chinese want to do is strengthen their currencies, making their export prices expensive and, therefore, their manufacturing less competitive in the world markets. You can forget about that fear.

Once again, the issue with Russia this month came up and what effect Russia would have if they tried to pursue further aggression in Eastern Europe. I almost laugh when people on television use this as a reason for the markets going down. I only need to remind you that Russia has GDP that is actually less than the country of Italy. I don’t think anyone is afraid of Italy and certainly no one accuses them of working too hard.

So we morph into the political arena of the potential impeachment of the President of the United States. Once again, a headline that means absolutely nothing in the whole scheme of things. While it is possible that the House of Representatives could impeach the President of the United States since the Democrats have majority, an indictment in the Senate would require a vote of two-thirds of the members and, since the majority of the Senate is held by Republicans, that is not a reality. So why are we spending all of these hours of talk and discussion over something that clearly could not possibly take place? In my mind, it has more to do with the fact that Congress is frozen with inactivity. They cannot pass even the most simplest of bills since they spend all of their time on conspiracy theories. When will Congress actually do what they were elected to do so we can move on with the country’s business rather than this silliness? Isn’t there an election next year?

There is no question that the President is a lightning rod for virtually all Americans. However, it must be said that he has accomplished many of the goals that he laid out in the campaign by reducing unemployment, being tough on immigration, and holding other countries accountable for their excess of unfair trade with the United States. In doing so, he has offended virtually everyone; which is okay with me. I think comedian Dennis Miller may have put it better than anyone else when explaining about current President Trump. As Dennis Miller said, “The simple fact is that if Trump was vaguely presidential, he wouldn’t be President”. I think that pretty much explains the situation. With the fabulous economy we enjoy today, the Democrats fully realize that they are not likely to beat this President at the polls so they must distract the attention of the public away from the economy.

So, my new worry is if Senator Elizabeth Warren were to win the democratic nomination and the Presidency, what effect would it have on the markets? Remember, she has openly wanted higher marginal tax rates, hikes in capital gains rates, and a higher tax on dividends. In addition to all of that, she wants a wealth tax on the richest people with a net worth more than $50 million. The net effect of higher taxes is to take money out of the pockets of consumers and turn it over to the government to allocate. Maybe that would be better, but not according to the economics books I read.

Medicare for all sounds attractive on paper, but consider how it would be run. The government does virtually nothing better than the private sector except defense. If you want your health program run by your local DMV, that’s where it ends up. I cannot even fathom that being a logical solution for most voters.

Regardless of what you hear in the financial news, the economy is still doing well. Surely there have been pockets of weakness but with the Federal Reserve now cutting interest rates and with the lower tax rates that are currently enforced, it would certainly not surprise me to see earnings actually up in the fourth quarter on a year-by-year basis. In summary the three components of higher stock prices are firmly in place. Interest rates are low and getting lower, earnings are high and stable, and the economy is strong and resilient and is likely to remain so for two years to come. Based on that trifecta of positive economic news, we expect equity prices over the next year to be higher than they are today.

I had to force you to read all of the updated financial information to get to the entertaining part of this posting. My history with the Atlanta Braves goes back, in many cases, before many of you were even born. I never started out to be a huge baseball fan; it just seemed to fall into my lap and has become an integral part of my past and hopefully future.

When I was attending Georgia State University to get one of my three graduate degrees, I did so at night after work. At that time, I was single and really had nothing else to do, so after school I would drive over to the old Atlanta Fulton County Stadium and park right outside the main entrance. In those days it was not uncommon that they would only have 3,000-4,000 people at a game. I would buy a General Admission ticket for $2, or oftentimes it would be so late when I arrived that they would not be collecting admission. You could go in the general admission part of the stadium, walk around and sit directly behind home plate since those seats were rarely used. I watched many games during the 1972-1976 Hank Aaron era. I would conservatively say I probably saw Hank Aaron hit 100 of his 755 homeruns during that time. The Braves rarely won, but I admired the ability of certain members on that team.

Josh, age 2, enjoying the Braves (1997)

Josh, age 3, at a Braves game (1998)

My real participation started in 1989. As many of you know, I had a long history with the former WTBS announcer Craig Sager. Not only did Craig and I have the majority ownership in the sports bar Jocks & Jills, we also had a long personal relationship before he died a few years ago. Craig had a difficult personality in a lot of respects. He was sure he knew everybody, and he could open doors no one else could open. In 1989 Craig agreed to buy four season tickets on the second row behind the dugout at Atlanta-Fulton County Stadium. The interesting part of that story is that while he agreed to buy them, he never had any intention of paying for them. When the invoice came due, he forwarded it to me since he thought maybe I would enjoy having them. At that time, four season tickets to the Atlanta Braves was outrageously expensive and clearly, I did not feel like I could afford them. However, since they were good seats and since Craig Sager had arranged them, I went on and purchased them. During those days the Braves were not very good, and I could hardly give the seats away. Who would have ever thought that in 1991 the Braves would go from last to first place and go to their first World Series game?

Due to these season tickets, I was honored to go to the World Series in 1991, 1992, 1995, 1996 and 1999. How many people can boast that they have actually attended World Series games in five years during the 1990’s decade? I was even there the night that Atlanta won the World Series in 1995. Tommy Glavine pitched a shutout and David Justice hit a homerun that won the series against the Cleveland Indians. I was there when they won 17 straight division championships; it has been a good run.

I have seen many interesting things and being with the Atlanta Braves has played a major part in the upbringing of my children. The first time I can recall taking Josh to a game was the September 30th, 1997 playoff game with the Houston Astros. At that time Josh was only 2 years old and as you can see from the picture, he fell asleep shortly before the first pitch. Later, when he regained some knowledge of what was going on, I thought it might be interesting if I got him a baseball from the field. I had come to know Braves shortstop Jeff Blauser quite well, so as they were coming off the field, I motioned to Jeff to throw me a ball so I could give it to Josh. When he did, I handed it to Josh to which he immediately threw it back at an unsuspecting Jeff – luckily he dodged it in time. I still have that very baseball in my office.

I was also there in July of 1993 when the press box caught on fire. As you can see from the picture I took that night, it was quite an event and the game was delayed for a couple hours before finally putting out the fire.

Press box on fire 1993 
David Justice and Deion Sanders

I was also there during the World Series in 1992 when Deion Sanders played for both the Atlanta Falcons and Atlanta Braves during the same season. Quite a media storm occurred when Deion would leave the Atlanta Falcons practice field and fly by helicopter to Atlanta Fulton County Stadium so he could play in the World Series. I was also there when they traded Deion Sanders to the Cincinnati Reds and completely destroyed the morale of the team that year. Deion was a huge fan-favorite, but not until later did we find out that behind the scenes he was very disruptive to the team and not the type of player Bobby Cox was used to coaching.

I was also there for the very last game in Atlanta-Fulton County Stadium, which was an eerie experience. Even though that stadium was clearly a dump by any standard, it was all I really knew when it came to professional baseball. It was pretty crazy to see the players come on the field at the end of that game, with David Justice walking around the stadium with his handheld camcorder to memorize the event for himself. As you know, in 1996 the stadium was imploded to make room for the new Turner Field which would be used in the 1996 Olympics.

Moving over to Turner Field, we had exactly the same seats and went through many memorable events there as well. I was there in 2000 when Sammy Sosa bounced homeruns off the 755 Club as he won the Home Run Derby. Looking back on the event, it should have been self-evident to everyone that steroids played a large part in his success given that those shots were well over 500 feet. The 2000s were not as successful for the Braves, but many of my clients were able to use those tickets since we have sold them to them for half-price for 30 straight years. Many interesting things happened during the 2000’s, but we never reached the success that we had in the 1990s. I even got to throw out the first pitch at Turner’s Field in 2005.

One memorable event that did happen at Turner Field was that of an unfortunate foul ball. Despite having tickets for 30 years now, I have never once actually caught a foul ball. It really could be said that I have never even been around a foul ball. They have been hit in my area, but I never really had a shot at catching one. I have been given over 100 balls by players coming off the field, but a foul ball, I have never caught.

In 2016, Dakota, Josh, and I took Ava to a Braves game. At that time Ava was about five years old. At some point during the game, a ball ricocheted off the dugout and actually hit Ava in the arm. Josh and I are both large people, above 6’4 in height, so the fact that a foul ball could find her between the two of us was quite remarkable. She was not badly hurt but, as you would expect, the medics quickly rushed to her to make sure no damage was done. It definitely made a lasting impression; her explanation when asked to go to any games after that was “Daddy, football hurts”. That led us to change seats at the new SunTrust Park. Now we have seats adjacent to the home plate on the eighth row; close enough to see the action, but behind a protective screen. Yes, we were there when Ronald Acuna, Jr. had a Grand Slam against the Dodgers in the 2018 playoffs. This team is exciting, but I guess it really makes no difference. I intend to be a season ticket holder for the next 30 years and whichever team they field, I will be there.

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

Tuesday, September 10, 2019

Standing Ovation at Vanderbilt University

From the Desk of Joe Rollins

Since there was not a whole lot of news in the financial markets during the month of August, I thought I would tell you about the time I received a standing ovation at Vanderbilt University. I will not share the details yet, rather just force you to read all of this other important information before you get there, but I think that you will be entertained. There are very few times in your life when you could receive a standing ovation from 14,000 people in an arena and not be appreciative. I think you will see that the ovation was totally warranted.

I also want to cover some other areas in this posting that I find interesting and I hope you will too. I continue to marvel at the flood of misinformation that is available everywhere today. I am almost of the opinion that constitutes a conspiracy of fake news more to embarrass the President than to educate investors. I want to cover some items that I think are important and you should evaluate. I also want to discuss the investment quality of bonds at the current time with the extraordinarily low interest rates we are enjoying. All of this new and exciting information follows, but now I must cover the financial markets for the month of August 2019.

Ava and Josh with the Statue of Liberty

As most of you know the month of August is a slow trading time and historically one of the worst trading months of the year. The month of August 2019 really was uneventful for the most part. The Standard & Poor’s Index of 500 stocks was down 1.6% for August, but continues to be up 18.3% for the year 2019. I would like to point out that this S&P 500 index had been up an average of 13.4% for the last 10 years. The NASDAQ Composite was down 2.5% in August and up 20.9% for the year 2019 and averages 16.1% for the ten-year period. The Dow Jones Industrial Average was down 1.3% in August, up 15.1% for the year 2019, and up annually 13.6% for the last 10 years. The Barclay’s Aggregate Bond Index was actually positive in August, up 2.6%, for the year 2019 it is up 9.1% and it has average annual returns of 3.9% over the last ten-year period. As you can see, each of the major market indexes performed roughly 4 times the bond index over the last decade.

I watch the major financial television news every day and am often amused by either the lack of veracity or the distortion of what they are reporting. When the short-term yield inversion occurred recently, the commentators were almost breathless in their explanation. Never have I seen such hysterics over such a totally meaningless financial occurrence. While we talk about the rate inversion, what we are really talking about is when the two-year treasury interest rate exceeds the interest rate of the ten-year treasury. It is quite an unusual time we have now where we have a one-month treasury yielding 2% and basically a 30-year treasury yielding less than 2%. So basically, you could buy a bond for one-month and make 2%, or you could buy a bond for 30 years and make roughly 2%. Does that make any economic sense to anyone?

Think about it just for a second. If you believe, as I do, that inflation will average roughly 2% for the next generation, why would anyone buy a 30-year bond yielding basically the rate of inflation? By basic economics alone, that bond would generate in real dollars no gain to you for the next 3 decades. Couple that with the fact that currently there is over 13 trillion dollars in European and Asian government bonds that have a negative rate of return. Basically, in Germany you could buy a $10,000 treasury bond and at the end of 10-years they would return $9,800 to you. I am trying to illustrate the absurdity of the situation and question why any informed investor would make that choice.

As I have explained in these pages before, a great deal of why the U.S. has such low interest rates is that the rest of the world is actually lower. If all you could get in Germany was a negative rate of return, you would certainly be better off invested in the United States where you would get some rate of positive return rather than negative. As the money rushes from around the world to buy U.S. treasuries, of course it deflates their currencies and increases the U.S. dollar. While many Presidents exploit the advantages of a strong dollar, in fact, economically it is not desirable. Since exports are overpriced and imports are underpriced, a high dollar actually leads to negative sales in the United States, which is not a good thing.

I read an interesting article that seemed to make a lot of sense in these crazy economic times about interest rates. Since 1976 there have been five significant yield inversion periods and in each case a recession followed. As is true in so many cases regarding financial matters, so-called experts quote the past to explain the action. I almost laugh out loud when I hear commentators quote on major news programs what happened in 1937 as compared to today. Surely no informed commentator would quote a period of time during the Great Depression as a comparison to the economic explosion we are enjoying today, but I digress.

I reiterate often in these postings that you cannot evaluate an economic event unless you understand everything that is going on around it. So why would five previous rate inversions be informative information in determining what might happen today? The reason is clearly documented by history. As quoted in these articles, during those five previous historic periods there was a spike in oil prices that drove up the price of crude oil by nearly double. As you can clearly imagine, if you doubled the price of oil over a relatively short period of time, the fear of inflation would be paramount. Oil impacts nearly everything in our lives including utilities, cost of transportation and the cost of goods. The doubling of oil prices clearly would lead to higher inflation.

The Federal Reserve has basically two mandates that it must adhere to. One is that it must control the rate of inflation and secondly, it must try to maximize full employment in the United States. As the price of oil doubled, the Federal Reserve would, by necessity, have to increase interest rates to slow the growth of inflation. So, in each of these five previous times, what you saw was an increase in interest rates to slow the economy which almost assuredly had more to do with the recession than the economy itself. If you compare that time to where we are today, it is clear to see that the financial circumstances are not similar. In our case today, the Federal Reserve is clearly trending with lower interest rates, not higher, and more importantly the price of oil has declined dramatically in recent years from previous levels. So, while the inverted bond yield might be informative to you, it clearly does not test the current economic circumstances. What we have today is dramatically different than we have had in previous bond inversions and, therefore, it makes no sense to assume a recession would follow based upon this economic indicator.

However, that did not stop the financial news from anxiously repeating this multiple times a day. If I’ve read one article about the upcoming recession, I’ve read them all. In fact, I noticed the major financial publications picking up on this projection, including major headlines reporting how you invest in the upcoming recession. What recession?

Let me give you an example of a very well-known financial person who, in my opinion, is a reporter of fake news. Ray Dalio is one of the most famous hedge fund managers in the United States, and it is reported that his personal net worth is somewhere in the $20 billion range. That is not chicken feed, even among rich people. While well respected as one of the best hedge fund operators, is he really trying to project financial activity, or is he a keeper of fake news? During a strong economy in February 2018, Ray Dalio caught everyone off-guard when he said that there was a 70% chance for a recession prior to the election in 2020. Since the call was greater than 50%, he was basically saying there was more likelihood than not that a recession would occur over the intervening 20 months.

Lo and behold, one year later in February 2019, Ray Dalio reduced his forecast of recession prior to the 2020 elections to 35%, and then in August of 2019 increased this prediction to 40%. It was unbelievable the amount of words that were spilled on national TV regarding these projections. As I watched commentators almost foaming at the mouth to explain the upcoming recession, I could not help but to reflect that even if Dalio was correct that there was a 40% risk of recession before 2020, did it not mean there was a 60% chance that there would not be a recession? It just never occurred to these commentators to report the inverse. As I am reminded by many media clients that I represent, “if it bleeds, it leads” I guess I should not have suspected otherwise. However, it is still unfortunate that investors are not given both sides of the argument.

I had a call last week with a client who indicated he was having trouble sleeping at night because he felt his portfolio was not performing well so he wanted to move to bonds. This statement caught me somewhat off-guard given that not only was it inaccurate, but clearly the client had not been observant of the financial markets. In the first part of September, the S&P 500 index is trading up to almost 20% and is 2% from the all-time highs. How anyone, for any reason, could believe that we are having a bad year in 2019 is mindboggling.

Reid and Caroline Schultz at sunset

As I continued to explore this conversation with the client, I tried to point out that we are in a time of historically low interest rates at a time when the financial economy is quite strong. I pointed out that the 30-year treasury is now trading at the lowest level it has ever traded at in the history of American finance. While this rate may stay low for a while, more likely than not, the next move on the treasury rate will be higher. If you are not aware how bonds trade, when the interest rates go up, the bonds go down in value which is not a good thing.

I also pointed out that the dividend yield on the S&P 500 today is almost 2% while the ten-year treasury yields 1.5%. It is rare indeed when the dividend yield of stocks is greater than the highest treasury rate quoted. Basically, that means that from dividends you can make more with the 500 index than you can make with a ten-year treasury. If you go about the calculation in a more basic manner, the S&P is currently valued at 18 times the projected 2019 profits and if you use the inverse of the price/earnings ratio, that implies a growth rate of 5.5%. Would you rather have the potential growth rate at 5.5% or the ten-year treasury rate at 1.5%?

As I explained to the client, there is no question that stocks are volatile and they go up and down, but over time, as illustrated in the comparison above, stocks make three or four times the returns than bonds will ever return. Now that we are sitting on the lowest interest rates ever in the history of American finance, could we reasonably expect rates to fall further or might they go up? Contrary to popular opinion, bonds can, and in fact do, lose money. Just to give you a normal example, on the average the 30-year treasury should be yielding roughly 3% greater than the ten-year treasury. If the ten-year treasury today is at 1.5 then the 30-year treasury should be yielding 4.5%. The reason for this is quite obvious. Over a 30-year period you take substantially greater risk of inflation, earnings and the economy. While a ten-year period is long, a 30-year is a large portion of a person’s lifespan. As an example of exactly how great the risk is, if the 30-year treasury would move only from 2% to 3%, which it was yielding in the fall of 2018 (roughly one year ago today), the value of that 30-year treasury would fall by a stunning 20%.

Just to give you a quick example of the value of stocks compared to bonds around the world, just consider the following information. In the United States, the ten-year treasury yields 1.56% at this writing. The dividend rate on the stock market currently is 1.92%. In Germany, the ten-year treasury yields a negative 0.6% and the dividend rate on their stock market is 3.29%. In the United Kingdom, the yield on a ten-year government bond is 0.59%, while the dividend rate on their stock market is 5.13%. I am not sure how many words or times it takes to emphasize that, fundamentally, the potential for higher interest rates is more likely than not and therefore bonds constitute a significant risk portfolio.

I noticed over the weekend that there were numerous articles written about the future of Social Security and how it would impact your retirement. Throughout my lifetime we have been discussing that Social Security is clearly going to run out at some point and adjustments need to be made. Well, I find that assertion absolutely absurd since I am 100% positive that would never occur. Clearly the General Treasury would step in and make Social Security sound, but there is no reason for even having this discussion. I cannot help but think that this discussion is paramount only for political reasons and not by economic sense. I am not going to bore you with how easy it would be to correct Social Security for generations to come since that discussion even bores me. I can only tell you that many learned economists have expressed the opinion that the issues with Social Security could be solved over the time it takes to drink a cup of coffee at breakfast. However, politically no one will have that discussion.

I was thinking back to a political rally I went to in 2004. I was invited to the old Civic Center auditorium to hear then President George Bush speak about privatizing Social Security. His mother, Barbara Bush, was present as were other distinguished people whom I do not recall. Basically, the President’s contention was that if we were to privatize Social Security, allowing a portion of those funds to be invested in equities rather than treasury bonds, the long-term benefits to Social Security recipients would be huge and the effect would dramatically reduce the cost to the taxpayers.

Joe and Ava

The reaction to President Bush’s suggestion was preposterous. You saw one politician after another almost foaming at the mouth to describe how absurd that proposal actually was. None of them cited Chile and the effect privatizing had on their Social Security system, which essentially made it self-sustaining. All they could warn the public about was that Social Security should not be invested in equities. I never really hear anybody comment on that today, but are you not a tad bit interested in what the effect would be? What if your share of Social Security had been invested in an index, such as the S&P 500 over the last 15 years, when Bush first made the proposal? How would your Social Security dollars have grown during that 15-year period if you had done just as George Bush had said?

Of course, any time we discuss investing, larger investors bring up the period in 2008 when the S&P index was down 38%. They give you that example to scare you of the potential risk that occurs in investing. They never actually bother to point out that of the last 16 years the S&P 500 index has been up 14 of those years. It is a fact that there are more up than down years in investing.

Just to give you an example, over the last 15 years the S&P 500 index has averaged a positive 9% per year. During that same time frame, the Barclays Aggregate Bond Index has averaged less than half of that per year. I want to point out that the last 15 years includes the 2008 stock market downturn. So basically over this 15-year period, including the stock market correction, if you would have had your Social Security dollars invested in equities rather than in treasury bonds, your returns could have been greater than they are today. This is even more compounded by the fact that treasury yields are so low today that, in the history of these investments, your future Social Security dollars are getting even less returns than ever. I often wonder to myself exactly where the Social Security system would be if privatization would occur. I think the record is fairly obvious that everyone would be receiving more Social Security today if invested in equities rather than bonds. I also think it is fairly obvious that the long-term financial stability of the Social Security system would be greatly enhanced, but you are missing one of the most important components of Social Security that is never discussed.

If the Social Security system were ever privatized or turned over to other people to invest, the politicians would lose control. In fact, they would not be able to dictate the future of your retirement, nor could they threaten you or warn you regarding the repercussions of any other choice. The reason the Social Security system will never be privatized in America is due to the stupidity of Congress itself. In so many ways, so many times a day, you hear such extraordinarily bad economic judgment coming out of Congress that I hope we all know now to consider any type of news coming from them worthless. There is no question that the Social Security administration should invest in equities for the betterment of all retirees. It can be a slow process of investing 10% per year for 10 years and everyone would have the option to do so or not. There would not be an option to take the money out or to spend it; it would be exactly how it is today except the returns on those investments would quadruple. I guess it is so simple to understand that it defies imagination and cannot even be discussed by politicians.

Okay, so I have teased you about my standing ovation long enough, so here is the full story. When I was playing basketball at the University of Tennessee, everything was new and exciting to me. Once we played in the old field house at Auburn University; it was so cold that there was actual ice on our clothing after practice. Fortunately for everyone, that building eventually burned down. One of the most unusual games we ever played, and where I received my first standing ovation, was at Vanderbilt University. You have to realize that this was in 1968, when not much local basketball was carried on TV and the quality of play was not particularly good. When I played there were only white players in the SEC. As this changed, I recognized I did not have the skill set necessary to play the game and I retired to more exciting things like accounting and finance. My idea of fun is different than most.

The Memorial Gymnasium at Vanderbilt University is one of the more unique basketball venues for basketball. It was built in 1952 and has a seating capacity of roughly 14,000 people. Who would have ever thought that growing up in a small rural town in Tennessee would afford me the opportunity to receive a standing ovation at such a renowned basketball venue?

The gymnasium has one very interesting feature. For reasons unclear to me, approximately the first three rows of the stadium actually sit below the level of the court. And the most unusual feature of all is that the benches for the players are not along the side of the court as they are in most gymnasiums. The actual benches for the teams are located at the end of the floor, which makes it unusual given that it takes a considerable amount of time to get to them if timeout is called and you are on the opposite side of the court. I believe that configuration with the benches at the end of the court may be the only major gymnasium in the United States where it exists.

I should have known that we were immediately in trouble when we came out for our pregame practice. At the University of Tennessee, we had this very elaborate warmup that had people running around in all different directions, but ended the layup line with somebody dunking the basketball at the court. As would be the case, as we were warming up someone kicked the basketball and it rolled off the court. It was the only ball we had. Since the ball rolled into the student section, they continued to throw it back and forth, preventing us from warming up. Much to our chagrin, the gymnasium was already completely full. The actual ball finally tended up in the upper deck before it was recovered by security and returned to us. However, in the meantime we lost about half of our warmup time.

That year the University of Tennessee football team was scheduled to play in the Orange Bowl after Christmas, and I am relatively sure the Vanderbilt student section attending our basketball game had partaken in some holiday cheer prior to arrival. As we were warming up, very large oranges were thrown from the upper deck - exploding like bombs on the court. As you can readily imagine, our team was anxious to avoid the projectiles, but the mess it made on the floor was somewhat overwhelming. The effect fresh orange juice has on a slick hardwood floor can be a little scary and none of us wanted to slip and slide during the pregame warmups.

My claim to fame came halfway through the second quarter. I went up for a rebound in a heavily congested area and one of the Vanderbilt players hit me with an elbow. I went to the ground, stunned by the blow, but when I looked up the whole team was on the far end of the court and there I was all alone. I had put my hand over my mouth which became immediately covered in blood and I knew something was wrong, I just did not know exactly what or how bad.

Josh and Ava in Central Park

After losing consciousness for a second, I then realized that someone had called timeout and I was literally there all alone under the basket, with blood pouring out of my mouth and down my jersey. I began to head towards my teammates on our bench, which was of course on the exact opposite end of the court where I stood.

I looked around again to try and determine where I was and where I should be going and began walking rather gingerly across the length of the court in my blood-stained jersey with my hand over my injured upper lip which would soon require 6 stitches.

To my surprise, almost 14,000 people stood, giving me a standing ovation. Not having gained total consciousness, I was not able to fully grasp what was going on at the time but I have to admit the thunderous applause and roar of the crowd was surreal. What a glorious feeling to have a standing ovation such as this when you are only 19 years old. Only later did I consciously understand that the standing ovation was not for me, but rather for the guy that hit me. However, at that age you will take any acknowledgement you can get.

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

Friday, August 30, 2019

Happy Labor Day!

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 2nd. We will re-open for business on Tuesday, September 3rd at 8:30 a.m.

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

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Thursday, August 8, 2019

"Good judgement comes from experience, and a lot of that comes from bad judgement." - Will Rogers

From the Desk of Joe Rollins

The title of this blog has a lot of meaning to someone like me who has been in this business for over 40 years. So many of the decisions that we make here on a daily basis are not driven by the headlines or the heated conversations we hear on the nightly news. Many are based solely on the wisdom gained through experience (40 years in my case). You learn that many of the headlines have nothing to do with actually creating wealth, and more to do with influencing trading. We are investors, certainly not traders.

There was so much I wanted to discuss this month, but I had to completely rewrite the blog after the news at month’s end. July was an excellent month from an investment standpoint, but as the month closed, the news changed all of that, creating volatility and uncertainty. I often wonder who the trolls are that sit around their computers in the middle of the night trading futures and trying to influence true investors. I frequently watch as the news is reported, and the instant change in the futures by hundreds of points is baffling. Surely, these people have not had the time to evaluate the news in such a short period of time to reflect a true evaluation. I intend to discuss how these wild moves in valuation of the futures is not indicative of true economic performance.

Before I discuss all of those extraordinarily important and interesting topics, I have to cover the financial news for the month of July. Once again, the critics argued that the month of July would clearly be a slow moving and highly volatile time due to people being on vacation and not at their trading posts. The one thing that has proven to be absolutely true is that so much of the market movement is now on autopilot and not controlled by the traders. As an example, since the advent of passive investing, more and more investors only invest in indexes that are not affected by the wild movements of the traders. So, during the month of July, the indexes proved to be very resilient to volatility and continued to move higher.

Employee of 35 years, Mia Musciano-Howard's
twins Marti and Mitch (age 15) with Ava and Savvy, Ava's cousin

The Standard and Poor’s Index of 500 stocks was up 1.4% during July and sits on a sterling year-to-date increase of 20.2%. The one-year performance of that index is 8%. The NASDAQ Composite was up 2.2% during July and sits on a year-to-date gain of 24%. The one-year performance of the NASDAQ Composite is 7.8%. The Dow Jones Industrial Average was up 1.1% during July and is up an excellent 16.7% in 2019 and is up 8.2% for the one-year period ended July 31, 2019.

Barclays Aggregate Bond Index was up 0.3% in July, is up 6.3% in 2019 and is up 8.2% for the one-year period ended July 31, 2019. For the first time in recent memory, the Barclays Aggregate Bond Index actually had a higher yield than the S&P 500 for the one year period. This, of course, is due to the massive selloff in stocks in the 4th quarter of 2018. However, it is certainly not characteristic of the index, given the 10-year annualized returns of the S&P 500 is 14%, while the 10-year annualized returns on the Barclays Aggregate Bond Index is 3.7%. Certainly, over a short period of time bonds can actually outperform stocks, but over a longer time period the performance of bonds is not even close to the value of index returns. Bonds are at all-time highs, not good.

It was an interesting month from an investment standpoint. As expected, the Federal Reserve reduced their short-term interest rates by a quarter of 1% on the next to the last day of the month; but in the course of doing so, Federal Reserve Chairman Jerome Powell made an announcement that the interest rate was a “midcycle adjustment.” As those words left his mouth, the market sank hundreds of points - not for any particularly good reason, but just because the Federal Reserve did not guarantee additional rate cuts. Recognizing how silly that selloff was, the very next day the markets turned around and rallied up to and above the level of the selloff. Everything was looking extraordinarily positive since Federal Reserve rate cuts almost universally lead to higher stock prices.

However, at 3 o’clock in the afternoon, President Trump tweeted out that the United States would soon levy additional tariffs on China since China had failed to negotiate any form of trade relief. With that statement, the markets sold off dramatically and they continued to do so through the weekend. Just as it has done in the past, China immediately met the increased tariff by devaluing their currency, effectively making the tariff neutral. With that action, for reasons that defy good economic judgment, the market sold off even more.

Let us go back and review what exactly has happened to the markets since the President first announced new tariffs. The first tariffs were announced in January 2018 after the markets had a 20% gain in 2017. At this announcement, all of the economists and stock traders predicted total chaos and the market went down 10%. A few months later, the markets completely recovered that 10% loss and were having a sterling year through September of 2018 when, once again, the President announced a 10% tariff on additional Chinese goods. As we all know (and suffered through), the market went down an ugly 20% over a period of 90 days, but quickly recovered. You may even recall that in May of 2019 the market went down 6.6% when the President announced new tariffs on Chinese goods of 25%. However, during the month of July all of the major markets traded back up to their all-time highs so these declines were nothing more than movements to a market, leading to higher valuations. The tariffs have had zero real effect on the markets to date, and here we go again.

This is why I pointed out in the beginning that good judgement over time is so much more important than reacting to everyday news. What affects markets has nothing to do with tariffs or international news, but rather everything to do with recession. If you properly evaluate where the economy stands on a daily basis, you do not need to know any other news in order to determine which direction it is moving.

Back in January of 2018, when the first tariffs were proposed, economists everywhere warned of the dangers that these tariffs would bring to the U.S. economy. I vividly remember reading that there was absolutely no question that these tariffs would lead to more inflation in the United States. Which would also lead to a slower economy that would almost universally predict recession in the United States - people would be out of work, breadlines like those during the Great Depression would form, and pure chaos would overtake the U.S. economy. And what was the outcome in the 1.5 years since the tariff increase? Virtually no effect on the U.S. economy at all.

Savvy (age 16) and Ava

On Friday of last week, the Treasury announced that the increase in GDP for the second quarter of 2019 was at 2.1%. In fact, the report on the GDP was actually much better than the headline number indicated. While the GDP was down from the first quarter’s excellent growth of 3.1%, this quarter was hampered by a significant move down in the value of inventories, which if properly evaluated would have actually put the GDP growth at 3% again this quarter. Also, it indicated that personal consumption was higher, and we all know that the consumer controls 75% of the GDP anyway. And what about inflation one and a half years after the first tariff increase? Based upon this report, the Federal Reserve announced a 1.4% increase in inflation, well below the 2% level they desire. So basically, the economists that projected total chaos in the U.S. economy were clearly incorrect regarding growth and inflation. But what about employment, surely it was down?

For the month of July, employment continued to grow at a very healthy rate. The U.S. economy added 164,000 jobs and unemployment remained at 3.7%. Remember that unemployment here in the United States is at a 50-year low and even more importantly, the underemployment rate also fell to 7% during the month. This is the lowest level since December 2000, which was after the incredible boom in the dot-com era when the entire economy grew super-hot and beyond its abilities to sustain that growth. As you can see from the figures above, those so-called expert economists were absolutely wrong when they predicted (1) that the economy would fail, (2) inflation would soar, and (3) unemployment would be widespread, bringing the economy down. They are batting 0 for 3 and will be wrong again, as I am predicting in this posting.

One of the things that has always baffled me about the tariff debate is what exactly do we import out of China that is a necessity in our everyday life? The numbers alone are clearly compelling. U.S. exports are only 12% of the U.S. economy and therefore not a significant number that would dramatically affect the economy one way or the other. Imports are only 15% and therefore, once again the effect is only minimal. While the President always likes to say that the Chinese themselves are paying the tariffs, that is clearly not the case. It is the people purchasing the goods from China that are paying the tariff through an increase in cost. To a large degree, these costs have been neutralized by the Chinese decreasing the value of their currency, therefore keeping the cost at a low level. So net effect after currency adjustments, big fat zero.

However, the above does not actually illustrate the effect on consumers. For the most part, we only import things of low value from China. Sure, we import coffee makers, microwave ovens, etc. but these are not items necessary in everyday life. These are also items that can be imported from other countries such as, Indonesia, Vietnam, Mexico, etc. And did you know that China is not even the #1 importer of the United States? China has fallen to #3 with both Mexico and Canada importing more goods into the United States than China itself. The effect of the U.S. consumer having the ability to transfer those purchases to other countries certainly validates the concern that the President has. If an item becomes too expensive because it is imported out of China, the consumer will simply not purchase it. In fact, very few items could only be manufactured in China and not in other countries. As more and more companies move their manufacturing facilities out of China, the effect of the tariffs on final goods is significantly reduced. Since these items are not critical, the consumer does without.

But what exactly is it that we export to China? Semiconductors produced in the United States are produced nowhere else in the world. This technology drives virtually every component of our high-tech life. Even the Chinese smart phone manufacturers use chips that are produced in the United States. Are you under the assumption that China could do without semiconductors produced in the United States? That is impossible to assume. Yes semiconductors are assembled in Asia, but the software is all U.S. based, and critical.

I concur with the President’s assumption that China must be brought on board to comply with the world’s protection of technology. For many years, the Chinese have indicated that if you manufacture in China, then you must turn over your technology to them. That is clearly in violation of the rules of global commerce and the Chinese must be held to the same standard. While the actions of the President are extreme in some cases, it appears that they might in fact be working and I agree they are way past due. For decades, U.S. Presidents have ignored the effects that China has on the transfer of technology and we can no longer do so. While we can clearly do without toasters, blenders and microwaves, they cannot do without U.S. technology. By limiting what they buy, we will slow their economy a lot faster than just limiting how many blenders they actually produce.

So, we headed into 2019 with “fears” of corporate earnings crashing and burning, soaring interest rates and disastrous earnings. None of these predictions have taken place. After the announcement of the one quarter of 1% rate cut by the Federal Reserve, interest rates on ten-year treasury bonds didn’t rise, but actually fell. At the close of business at the end of July, the ten-year treasury was at 1.8%, which was the lowest level it had been since the beginning of 2017. These low interest rates will almost assuredly reinvigorate the housing market and the investing market. Both of these low interest rates are very good for the economy. As pointed out previously, employment remains extraordinarily strong and interest rates are low and the economy is stable. As we can see, the trifecta of components for higher stock prices is in place. None of us can forecast the future and none of us know exactly what will happen with this increased threat of tariffs, however, with history as your judge, you can see that the effect on the economy thus far has been very muted.

If we were to see a major reduction in earnings as we move forward, I would be concerned; however, the current projections actually show exactly the opposite. We were told that earnings would suffer a major decline in 2019 because of the tariffs. In fact, it looks like for the second quarter of 2019, earnings will have increased by 2.1%. While 2.1% is not a huge increase, you need to put into perspective that this is against all-time high earnings from the previous year. What is fascinating about the discussion of comparative earnings is that they are up against a quarter when the effect of the tax decrease was not even in play. The actual accounting for the lower end of corporate tax rates did not occur until the fourth quarter of 2018. Therefore, the accumulative effect of the comparison in earnings where apples equal apples and tax rates are low for both quarters will not occur until the fourth quarter of 2019. If the projections for fourth quarter earnings are correct, the year-over-year increase would be a staggering 23.6%. No one absolutely knows what will occur in the fourth quarter of 2019, but even if that percentage is wrong by a factor of one half, a 10% increase in earnings year-over-year cannot be anything other than a positive effect to the economy. Do not let the media confuse you on economic terms.

As I started this blog, I pointed out that experience brings knowledge. So much of the knowledge that we have today is because of mistakes we have made in the past. Hopefully, you learn daily by prior mistakes. I am often amused when I read about people nowadays who portray themselves as being financial consultants. I read that life insurance agents, stockbrokers and young kids right out of college consider themselves to be financial analysts and consultants. I would argue that you can learn to be a stockbroker in a year or two, but you cannot learn to be a financial consultant in 20. It takes many years of analyzing data and seeing the effect of the markets to really know what to expect. After 40 years of actually investing money for clients, maybe we have seen more and done more than the average financial advisor and therefore maybe we do it better. That is my story and I am sticking to it.

I fully expect that for the rest of the summer and the first month of fall that we will see high volatility. There will be days the market will move dramatically one way or another without rhyme or reason. The reason I think we are going to get this volatility is that the pros have not made much money in 2019. The market has vastly outperformed most everyone’s projections and therefore the pros have underperformed. The only way to make money is with volatility. They do not care which way the markets move; they just make them move. While I think this volatility will be heightened as the year progresses, I do not anticipate that it has any long-term effects and the year will still end up being quite satisfactory as we projected.

Joe and Ava enjoying some time in the ocean

At the beginning of this year, based upon the analysis that I prepared at the end of 2018, I projected that the S&P 500 would reach a level of 3,000 at the end of 2019. Since we have already exceeded that level of 3,000, I would say that that projection needs to be updated. Based upon all of the information I have now, it would appear to me that the S&P should end the year at 3,100 and therefore, even though we should suffer high periods of volatility, the trend is clearly up and not down.

The sad news about tariffs is that only one man, the President, controls them, He can, at any time, make them go away with one signature. So politics then turns into this game of chicken. I will give you another projection; I think the tariffs will be settled immediately before the next election, about this time next year. The sad part is that no one will care if it is a good deal or bad deal, it will be celebrated either way. I hope the President does the honorable thing and makes the Chinese do what is right before settling. Whether he does or not, the media will love it and the economists that have been so wrong so often in the matter will line up and tell you “I told you so.” Only here did you get the real facts about tariffs and not the opinions that were wrong.

I have been asked by several readers to retell the story of my father and the history of my upbringing. My father was a big influence on me, although we were never close on a personal level. Since he was a minister, it seemed that he had a meeting of some sort or another at the church every day of the week. Obviously, I was gone during the day at school and he was rarely home at night. In fact, he never saw me play basketball until I was on a college team. But he was truly an inspiration for his intellect and his career.

As I have often relayed, my father graduated from the University of Tennessee with a master’s degree in electrical engineering. Anyone aware of the demands of electrical engineering understands the rigid requirements. To his bad luck, he graduated during the great depression and of course there were no jobs available. It was not that he did not seek out a job, there were simply no jobs available to anyone.

He returned to his home in Chattanooga and after not finding work, he took a remedial high school teaching job where he taught both mathematics and his first love, building things in the shop. His entire life he loved working with wood and he thoroughly enjoyed teaching it to high school students.

His father, my grandfather, was always very active in the church and since the church was only a short walk from his house, they attended often. My father fell into the Ministry, which would end up being his lifelong job and he never returned to electrical engineering. I have often said that my father could do absolutely everything and that was very much the case. One of the interesting aspects of my father was that when we were in Abingdon, Virginia, he became a district superintendent to 114 churches. He did not have a specific church to work at any given day, but he had managerial responsibility over 114 of them. Most of these were very rural churches, sometimes only having 20-30 total parishioners. I spent many of my formative years going with him to these churches, where he worked out the economics of a small church and would always preach the service.

Another lifetime remembrance I have is that he was the only white minister in town at that time that would marry a black couple. In Abingdon, Virginia during the early 1960’s it was a very segregated community. Obviously, the number of black ministers was limited and they all knew my father would marry black couples at any given time. I spent many of my Saturdays and Sundays opening the door for young black couples wanting to get married. I also remember that my father oftentimes would come in from the garden covered in mud to prepare the service. No one ever called to make reservations; they would just show up any time - day or night. I also recall that the compensation for the service was exactly one dollar. That one dollar always went to my mother to be spent on her children. My mother never spent any money on herself; it was always money for the children. My father and mother managed to send 5 children through college without loans when the most he ever earned as a minster was $14,000.

My father’s last assignment was in East Ridge Tennessee. At that time, East Ridge was principally white, but the segregation of the city was ongoing. There was a complete war within the city limits of East Ridge regarding the integration of churches and my father became a central figure in the controversy as he openly campaigned for new members, regardless of their color. The stress and controversy over this took a major toll on his health and he died of a heart attack at age 67, when I was only 25. Maybe he did not need to fight that war, but he always did what he believed to be the right thing. He could have made a lot more money in business, but this was his calling.

At that time, I had already moved to Atlanta, but I went back for the funeral. What made a large impression on me was that members of the various churches where he had preached made the pilgrimage to Chattanooga. People I had never even met and members of the churches he had been 15 or more years removed from showed up at the funeral. The church was overflowing with people who came to express their condolences and I had no recognition of ever meeting most of them. The inspiration to do good and work hard, and in turn be an influence in someone’s life was not lost on me. We should all be so lucky.

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.

CiCi at the beach

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

Best Regards,
Joe Rollins

Wednesday, July 3, 2019

The S&P 500 had its best June performance since 1955... The Dow posted its biggest June percentage gain since 1938 and financial advisers that are giving their clients such faulty advice.

From the Desk of Joe Rollins

It is amazing how quickly the financial markets turn. During the month of May 2019, the financial media tried emphatically to convince you in every way possible that the world as we know it could soon end. Surely, the financial markets would suffer with all of the negative headlines regarding tariffs, inverted bond yields, war in the Middle East and unfavorable relations with other countries. I vividly recall the huge downturn of the markets in May, when the President announced additional tariffs on China. So many financial advisers were spouting the notion that the inverted bond yield would clearly create a recession and stop the U.S. economy flat in its tracks. How did those proclamations work out?

As you can tell by the title of this posting, the financial markets had record results in June. In addition, the many assertions of financial disaster, made by so-called experts, were clearly proven incorrect. I want to go through a few of them and discuss how they were wrong. I also want to cover the extraordinarily bad advice being given by the large financial institutions. It absolutely blows me away that so many people out there are calling themselves financial advisers when, in actuality, they are only salesmen of a model portfolio that has absolutely nothing to do with one’s particular needs. I will cover that in greater detail later.

CiCi in camouflage on the beach

As always, I must cover the financial results for the month of June. It is not often that I get to cover such excellent financial results for a one-month period. In fact, the first half of the year has been extraordinary in its performance and the markets have reached all-time highs. If there is one thing that you as an investor should learn from the sell-off in 2018 and the rally in 2019, it is that you should never believe the people on the television proclaiming “Disaster looms ahead…” What you should believe in are the fundamentals of the market, not the headlines. As I pointed out at the end of the fourth quarter of 2018, and in the first quarter of 2019, the fundamentals were strong, the earnings were great and interest rates were low - all three of those economic factors will lead to higher markets eventually. No question there was volatility and no question that there were many questions raised by investors, but in the end fundamentals won.

The month of June was excellent among the indexes. The Standard and Poor’s Index of 500 stocks was up 7% for the month of June, up 18.5% so far for the year 2019, and up 10.4% for the one-year period. The Dow Jones Industrial Average was up 7.3% for the month of June, up 15.4% for the year 2019 and 12.2% for the one year ended June 30th, 2019. The NASDAQ Composite was up 7.5% for June, up 21.3% for the year 2019 and up 7.8% for the one-year period ended June 30th, 2019. The Barclays Aggregate Bond Index was up 1.2% for June, up 6% for the year and up 7.8% for the one-year period. As you can see, each and every one of the indexes was up very impressively for the month of June and also very impressively for the year to date.

I cannot believe the amount of ink that has been wasted on the inverted bond yield discussion. One thing that always baffles me is the use of graphs by those claiming to know something about stock markets. It is amazing how many people I see expressing their opinion on the direction of the markets by comparing it with a certain date and time in the past. For example, I noticed the other day a so-called graphing expert’s market forecast included the same time period in 1938, 1980 and 2019. Surely, this forecaster is not so na├»ve to underestimate the economic differences between the time periods quoted. 1938 was the tail end of the recession and the country was barely surviving. In 1980 interest rates topped 20% and the country was in a recession. In 2019, interest rates are extraordinarily low, the economy is strong and unemployment is at a 50-year low. Really, if you compare the three time periods, how can any comparison be valid that tries to chart the market? Each of those time periods would have huge differences in the underlying economy, but yet a comparison was made and an opinion expressed. I have to tell you I lost respect for the show that aired such an analyst, given the absurd nature of the assumptions.

Let me give you a more specific example. During the third quarter of 2018, the economy was great and the markets were soaring. At the point the interest rates became inverted, you heard every so-called expert expressing the opinion that within a 12 month to 2-year cycle, the U.S. economy would absolutely be in recession. I sat back when I heard these exclamations and marveled at the lack of support for these opinions. Yes, it is unusual when the federal funds rate is actually higher than a 10-year treasury rate, as it is today. As a predictor of U.S. recession, it is not so precise. In researching the accuracy of these market calls, I went back to actually review the data. Did you realize that the yield curve was inverted in the years 1995, 1998 and the year 2000? Once again, in each of those years the economy was strong and the markets were soaring. However, only in the year 2001 did a recession occur, which had more to do with the dot-com implosion and the terrorist attacks of 9/11. Therefore, even in current economic times this proclamation of a guaranteed recession is not supported by simple research.

Yes, we were truly honored to once again be named to the 300 Top Registered Investment Advisers in the United States by the Financial Times for 2018 and 2019. What gives me great comfort is that there are likely 300 advisors in the Atlanta area and we were picked as one of the top 300 in the United States. But I should not be so surprised at that recognition given the absolute lack of good advice so many advisers are giving. What I found after 40 years in the business is that advisers are oftentimes controlled by their biases for higher income. I see major financial firms filling our soon-to-be clients’ portfolios with these so-called partnership hedge funds and other alternative investments that pay high fees, but earn low returns. These investments make the tax returns very difficult to prepare and if they make money, I would look the other direction. The sheer thought of putting a client in an investment that would give the salesman a 10% commission yet underperform makes me nauseous. It is amazing that clients continue to buy these worthless alternative investments when normal financial investments provide much greater returns without the high commission.

The current trend in the major investment houses is to use salesmen that are barely trained in financial applications. Basically, they just sell a model portfolio that is developed for their clients. What is interesting is that most clients will never talk to the person investing their money. The actual model portfolio has nothing to do with the client and everything to do with making clients adapt to a fixed formula with absolutely no correlation to their financial history. We invest all of your money in this office.

As I have pointed out on many occasions, the financial textbooks all talk about a balanced portfolio between stocks and bonds. The unfortunate part of that financial example is that it was created at a time when interest rates were substantially higher. If you made an allocation to a treasury bond making 5%, well that certainly makes some sense. However, to allocate to a treasury bond today with a 2% coupon for the next 10 years borders on absurd. Basically, if you commit to that 10-year treasury, when inflation is virtually the same percentage, you will be lucky to get back the same inflation-impact dollars that you originally invested. There is no opportunity for growth and the income component is insignificant. Anyone would make that allocation today is clearly does not understand basic economics.

Ava and CiCi on canvas, painted by our client, artist Kim Daniel

We see a lot of clients who have been encouraged to invest in income investments, thus giving up the opportunity for higher returns in equities. Certainly, everyone needs diversification, but each person is totally different. Why would you ever make the same allocation to a person that has leveraged every asset they own and requires high income to service his debt, as compared to a person with no debt and no current need for the money? Most financial advisers would treat those people exactly equal. Basically, they would decide on the allocation of assets based upon their age, their income and their need for income during retirement. However, those people are entirely different and should never be allocated the same way.

As an investor you can see the benefit of these low interest rates. Even as the so-called experts were forecasting disaster with the inverted bond yield, if you really understood the effect of lower interest rates you saw the positive. Once again, homeowners can now refinance at below 4%. In fact, I have seen 7-year fixed and variable rates down close to 3%. Two things happen when interest rates get down this low. The new housing market will pick up due to the fact that more people can afford the mortgages and the refinancing market will accelerate, freeing up more money for homeowners to use for other consumer goods.

Think about all the opinions of impending financial disaster that were shared regarding the effect of tariffs. You may not even recall that in January of 2018, President Donald Trump announced a tariff of 20% to 25% on washing machines imported into the United States. I have written many articles regarding those opinions when they feared these tariffs would force young households to absorb what was sure to bring damaging higher prices.

It has been roughly 18 months since the imposition of these washing machine tariffs. Have you heard any negative financial information regarding these tariffs? In fact, the economic effect has actually been mainly positive. Over this 18-month period, the price of washing machines has gone up roughly 12%, not the 25% cost of tariffs. The washing machine manufacturers in the United States have also been able to increase their prices, stabilizing U.S. jobs, since they do not have to sell their products at a loss. In addition, the U.S. is believed to have collected over $100 million in tariffs from foreign manufacturers in producing these products. While there is no question that people buying new washing machines have to pay a higher price, the effect of helping employees in the United States that work with these products and raising additional taxes from foreign manufacturers seem to weigh in the positive rather than a negative. Once again, the proclamations of financial disaster in reality were never there.

During the month of June, the President announced that effective immediately the U.S. would levy tariffs on all goods coming out of Mexico into the United States. There was huge outrage and public exclamations by so-called experts that the United States could not survive without Mexican products or the workers who migrated from Mexico that do menial work in the states. In fact, it was such a contentious topic that the financial markets dropped just from the announcement.

Employee Lesley Bartlett's kids - Sasha (10), Vincent (9) and Lily (10)

Once again, by Monday of the following week, the tariffs had been suspended with a new working arrangement between the United States and Mexico regarding immigration. Just the virtual threat of tariffs did more to help the immigration policy of the United States through Mexico in 1 week, than what has been accomplished in 25 years. The exclamations of financial disaster regarding tariffs have to be balanced against the economic reality between the countries. In this particular case, while immigration is not an economic factor in itself, the end result will justify the threat. Last month I expressed the opinion that the media was making a bold attempt to otherwise convince the general public that the economy was in trouble. Oftentimes in bold headlines, opinions are expressed that have nothing whatsoever to do with reality. I expressed the fear that the many people who only read headlines and do not follow the facts could be led to believe negative economic news.

In June, with major headlines in virtually all publications, a survey by Bankrate.com indicated that 40% of Americans believe that a recession is already here. When I read that headline, I could hardly believe this was not a joke. 40% of Americans would constitute over 125 million Americans who clearly must live under a rock. How could anyone who sees the prosperity around them truly believe the U.S. is in a recession? As one quote in the survey said, “the unemployment rate is the lowest in 50 years – doesn’t mean that everyone’s got a job, doesn’t mean that everyone’s doing great.” Yes, that is true, there are some people that are not employed. However, I rather suspect that is by their own desire and not for lack of jobs. Every industry I know is hammering for employees and even the fast food industry cannot employ quickly enough.

The next area of improper information for investors is the often-repeated exclamation that the economy is slowing. I get up very early and watch the international news from Europe, Asia and the United States. They bring on so-called experts in the field of investing and the one common expression that they all seem to use is that they are concerned about the stock market because the economy is slowing. Isn’t it interesting that they do not explain why that is a problem or explain exactly what that means? I will give you an opinion here that will convince you that we invest not by tired, old economic theories, but by the reality of the current economy. Yes, it is true that the economy is slowing, but that is a good thing.

Many times, in these postings I have criticized the work of former Federal Reserve Chairman, Dr. Alan Greenspan. I have indicated that for years he ran the economy up and down to the point of boom and bust, which was completely unnecessary. He would allow the economy to accelerate without any type of controls and then he would crash it by increasing interest rates and constricted liquidity. The fact that the current Federal Reserve is attempting to control the economy is much more positive than you might think. The Federal Reserve increased interest rates 3 times recently as the economy strengthened. When the economy slowed, the Federal Reserve announced that the most likely effect would be a lower interest rate in the upcoming quarters. That is exactly what the Federal Reserve should do, move interest rates up in an expanding economy and move them down when it slows. The effect is a leveling out of an economy that should not be “too hot or too cold.” This is completely different than what happened under the Greenspan economy. Let me illustrate that with real numbers.

Everybody remembers the rah-rah years of the late 1990’s. It was a time that the dot-com people were getting rich basically by selling paper on Wall Street. I remember many dot-com companies that had no revenue that were using their IPOS to raise billions in ’98 and ’99. Also, everyone remembers the dot-com skyrocketing in 1999 and crashing in 2000. Very few people understood exactly why this expansion and bust occurred. As we now know, Dr. Alan Greenspan was greatly afraid of what would happen in the Y2K conversion. As is well known, Dr. Greenspan never used computers, nor was he computer literate. Since he did not understand what would take place during Y2K, his primary assertion during the late 1990’s was that the economy must be strong in order to withstand the huge economic bust that would occur when the computers, clocks and everything we know about would not be updated on January 1st, 2000.

To give you an example of his lack of understanding the economy, the GDP in 1997 was 4.4%, inflation was 1.7% and unemployment was 4.7%. In 1998, the GDP was 4.5%, inflation was 1.6% and unemployment was 6%. In 1999, GDP was 4.8%, inflation was 2.7% and unemployment was 6%. Each of those numbers are extraordinarily good, but should illustrate that they are way too hot. The Federal Reserve did nothing to slow and temper the economy during these crazy financial times. In fact, GDP was above 4% for 4 straight years during these times and what do you think the Federal Reserve actually did?! Beginning in 1997, the Federal Funds rate was 5.5%. As compared to today, the Federal Funds rate is roughly 2.25%. During 1998 with the GDP growing at 4.5%, rates actually went down from 5.25 to 4.75%.

The Federal Reserve should have been proactive in an economy that clearly had become too strong. Yet, the Federal Reserve allowed it to do so, leading almost assuredly to a hard landing at some point. Not until June of 1999 did the Federal Reserve increase rates, and they did so very aggressively. On June 30th, 1999, the Federal Funds rate had been raised to 5% and less than one year later the Federal Funds rate was at 6.5%, increasing over 1.5% in less than one year.

Employee Shelley Fietsam's son, Cameron (11)

As you would expect, when the Federal Reserve increased rates so dramatically over such a short period of time, the economy took a severe downturn. The NASDAQ Composite suffered a 75% decline from March of 2000 to the end of 2002. In fact, the GDP in 2001 fell from 4.1% in 2000 to 1% in 2001, which was also attributable to the 9/11 attacks. Recall that I indicated the Federal Funds rate at March 16th, 2000 was 6.5%. At the end of 2001, 18 months later, that same rate was at 1.75%. I could go back and give you all of the reasons why these interest rates jumped around and the effect on the economy. But the one thing that we need to understand is that the Federal Reserve was asleep at the wheel. They should have been increasing interest rates during 1997, 1998 and 1999 to smooth out the economy and reduce the volatility in the economy. Certainly, the recession in 2001 was wholly created by the Federal Reserve and the absolute avalanche of rate cuts in 2001 were to cover their footprints.

I gave you a long economic history to explain why the current fact that the economy is slowing is positive for stocks. It is clear that the Federal Reserve intended to slow the economy in 2018 and they were successful in doing so. It also is clear that the Federal Reserve intends to stimulate the economy later this year to keep the economy strong. All of these are extraordinarily positive signs for future stock prices. Unlike the proclamations by the so-called experts, a level economy is what we all desire. We desire a GDP of roughly 2%, an inflation rate of roughly 2% and unemployment of roughly 4%. The fact that we have been operating at those levels for several years now is extraordinarily positive.

As we sit here today, we certainly expect volatility for the rest of the year. It is crystal clear that the media will attempt to convince you that the economy is weak. We now know that their attempts are based on incorrect, incomplete information. The economy is not weak, but yet strong. If the Federal Reserve does their job over the next 6 months, there should not be a recession over the next 2 years. It also is clear that corporate America is focused on higher earnings and is using the worldwide economy to improve their financial outlooks. I have been saying for a long time that the reason the market continues to go up is that interest rates are low, the economy is strong and earnings are high. As we sit here in July 2019, those particular items are actually better today than they were 6 months ago and therefore I project that the market will zigzag its way higher and round out the year 2019.

There is no question that a sitting President has a great effect on an economy. A President can do many things to stimulate an economy leading into an election. There is also no question that this President desires for the economy to be stronger as he campaigns for lower interest rates from the Federal Reserve. Since it is inevitable that this President would like to be reelected in 2020, there is a high likelihood of the economy continuing to expand over the next 18 months. Those that are espousing a recession in the United States either are expressing an opinion without any type of economic background or clearly have political biases in their exclamations. One of the things we try to do here is give you facts, not headlines. The facts do not support any type of recession, which likely moves the market higher rather than lower without a geopolitical event occurring. You can not invest for geopolitical events; you can only invest for the financial fundamentals.

As always, we encourage you to come in and 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