Wednesday, June 9, 2021

“Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves.” – Peter Lynch

From the Desk of Joe Rollins

Probably a great deal of the investing public has never heard of Peter Lynch.  During my formative years of investing, he was the most famous investor of all time.  Peter Lynch ran the Fidelity Magellan Fund for 13 years with an average gain of 29.2% and had unparalleled success.  Even in the stock market crash of 1987, Fidelity Magellan Fund had a positive return.  I think his advice above is very important today as we face a recovering economy and an earning explosion.  

I became curious as to why so many investors are unwilling to invest more money during this time, so I did an informal survey to find out exactly what is bothering people and preventing them from investing.  I got many responses, but most of them centered around the potential increase of inflation, the wild and crazy spending in Washington whether the economy is actually recovering, a potential increase in interest rates by the Federal Reserve, and a basic misunderstanding of corporate earnings.  

Ava posing with her 10th birthday 
celebration signs

I have decided to address these issues, so my readers understand exactly where I stand.  I also want to give you information regarding the recovery of the economy that is in controversy.  It is so absolutely crystal clear to me that the economy is exploding on the upside, that it is fascinating to me that so many people continue to question it.  Also, I want to discuss general investing policy and how that affects your potential retirement.  I always like to quote the famous investor Warren Buffett, when he said “Do not save what is left after spending, spend what is left after saving.”  I intend to cover all those subjects and hopefully convince investors that many of the fears expressed above are either temporary or completely misplaced.  

Before I do so, I need to reflect on the performance of the financial markets for the month of May.  As you know the year 2020 was an extraordinary year on the upside for the markets.  It has also continued into 2021 with the markets continuing to rise.  One of the oldest sayings on Wall Street is, “Sell in May and go away.”  I think if you follow that advice over the summer months, you may miss a good opportunity.  

The Standard & Poor’s Index of 500 stocks was up 0.7% in the month of May and is up 12.6% for the year 2021.  The one-year performance on this index is an extraordinarily high 40.3%.  The NASDAQ Composite was down for the month of May 1.5% and is up 7% for the year 2021.  The one-year performance on this index is a 45.9% increase.  The Dow Jones Industrial average was up 2.2% during the month of May and is up 13.8% for the year 2021.  The one-year performance for the Dow Industrial is also an outstanding 38.6%.  Just for the sake of comparison, the Bloomberg Barclays Aggregate Bond index was up 0.2% in May, but is down 2.5% in the year 2021 and is also down for the one-year performance at negative 0.7%.  

Kari and Adam’s engagement 
photoshoot before their June wedding

If you compare the three major market indexes, which were up 38% or higher over the last year, you can see that the bond index was a major disappointment, reflecting a negative return for the one-year period ended May 31, 2021.  One of the major reasons for concern for investors is that they believe that inflation will soon impact virtually every item we purchase and every commodity that is essential for the everyday budget.  There is no substantial evidence that inflation will impact the economy this quickly.  In fact, if you go back and review the history of inflation, you will realize that it takes many years to actually affect the economy in general.  

I was here in Atlanta during the 1973 oil crisis.  Most people do not even remember that the reason that crisis occurred was because OPEC, “Organization of the Petroleum Exporting Companies,” decided to withhold oil from all the countries that supported Israel during the Yom Kippur War.  Basically, the OPEC countries decided that they would not sell oil to the United States during this time period and correspondently, the U.S. suffered through a substantial decline in its oil imports and a substantial increase in price.  During that time, the use of oil affected so many different aspects of the American way of life it forced prices up almost immediately.  The price of oil went up almost 300% from $3/barrel in the U.S. to nearly $12/barrel.
I can vividly remember standing in line to purchase gasoline during that very difficult time.  I also recall the dramatic increase in the price of a gallon of regular gasoline which rose 43% from 28.5 cents a gallon in May 1973 to 55.1 cents in June 1974.  Just looking at the above numbers you would think that inflation would impact the United States almost overnight.  But history reflects something else.  

It wasn’t until the late 1970’s (6 years later) that inflation really became a serious financial issue for the American economy.  Yes, we had inflation prior to that time and went through ill-placed actions by the government to hold down prices, which was unsuccessful.  However, it really got out of control during President Jimmy Carter’s years, when double digit inflation was commonplace.  The point of this scenario is that it takes years to impact the economy with significant inflation.  I think we are seeing that reflected today.  Even though prices are moving up, inflation in the economy is almost assuredly an event that will be years from now before it will affect and hurt the U.S. economy.  It even looks like some of the prices have already started to moderate.  

You also see it in the words of the Federal Reserve members that are most influential in controlling interest rates.  The most important regional bank in the Federal Reserve is the New York Federal Reserve.  Its President, John Williams, recently said we are “Still quite a ways off from maintaining substantial further progress.”  Basically, what he quoted was a reflection of Federal Reserve’s Jerome Powell’s many statements saying that the economy has yet to overheat and, therefore, any changes by the Federal Reserve at the current time would be unwarranted.  

There is also a clear misunderstanding of how inflation impacts financial markets.  There is no question that if the Federal Reserve started to increase interest rates dramatically, it would start to hurt stocks.  But using the Federal Reserve’s own words, that may be years away.  It is, however, already dramatically hurting the performance of bonds.  As noted above, bonds for the one-year period had a negative rate of return.  Bonds are not a good investment right now.  However, the effect on stocks is much more positive.  

Morgan seeing the waterfall while 
hiking at Roswell Mill

If you envision a company that has inventory and inflation had increased the prices of that inventory, they have instant gain with an increase in the underlying products that they sell to the public.  This instant increase in prices generates future higher profits for the company.  In addition, the assets owned by the company are likewise increased in value due to inflation.  Therefore, the machinery, equipment and real estate also have a higher valuation prior to the increase in inflation.  While these increases in valuation do not necessarily increase the value of the stocks, they dramatically increase the cost for a competitor to come in and compete with the company itself.  This increase in fair market value of the underlying assets is very much a positive for corporate earnings.  Why some question that runaway inflation would have a dramatic negative effect on the economy, it appears at the current time that this economy is literally “on fire” with the Federal Reserve waiting for future increases for future information to make any change in interest rates.  

There was a short-term sell off of the stock market last week when the Federal Reserve announced that they would be selling some of their corporate bonds that they have accumulated during the crisis.  However, what they did not specifically mention was that they would not be selling any of their Treasury bonds.  In fact, the Federal Reserve currently continues to buy Treasury bonds on a regular and continuous basis.  Most people are confused why the 10-year treasury has not moved significantly above the 1.6% rate when reported inflation is well above 2%.  There is a specific reason why that rate is continuing to be steady.  With the Federal Reserve basically buying up all the excess Treasury bond issued it is unlikely that rate will move dramatically without the Federal Reserve backing off.  At the current time, the Federal Reserve announced that it is not their intention to back off on these purchases prior to 2023.  Therefore, if your major concern is that inflation would impact the value of your stocks on a current basis, that is misplaced.  

Danielle, Reid and Caroline smiling for this 
sweet shot

One of the items that always perplexed me was why people do not save more.  I get the answer as quoted above by Warren Buffett that they just don’t have any money left over after their monthly expenditures to save.  What I have seen over my 50 years in the business, young couples come out of college and both begin working simultaneously and make a good income.  Over time they just increase their expenses so that their monthly budgeting equals basically their income.  When asked why they do not save more they reflect upon all the expenses and indicate there is nothing left to save.  

I often question why people tell me they only put in their 401(k) plan exactly what the company matches.  Since a 401(k) is, under current tax law, the absolute largest tax deduction a young professional could get, you wonder why they do not participate more.  In fact, in most cases, virtually all workers should attempt to maximize their 401(k)’s on a regular basis.  If you look at a chart where you start to save early in life and continue to save over time, a financially secure retirement is almost guaranteed.  However, if you wait until later in life the difficulty to accumulate these amounts are enormous.  

As we all know the stock market on average goes up 9% a year,  yet too many people are trying to time the market and ignore that proven fact.  If you look back to March 2020 all the people that sold out of the market during that time period were the losers in a financial market that was legendarily high.  Take a look today at all of the cash sitting in checking accounts.  It is now estimated that over $3 trillion is sitting uninvested in money market accounts today.  We all know that money markets are paying virtually zero interest and CD’s are paying almost zero.  As noted above, over the last one-year period, the S&P 500 is up 40% and money market accounts are up 0.1 of 1%.  You do not have to be a Philadelphia lawyer to understand the value of being invested as compared to being in cash.  

The Schultz family in their
Sunday Best

Last week the Commerce Department reported that May hiring increased by 559,000 employees.  It also announced that the unemployment report dropped from 6.1% to 5.8%.  However, with those numbers came out the stark reality that there are still 9.3 million people in the United States that are unemployed and potentially available to work during the month of May.  One of the major components of inflation is job-related wage increase.  It should be evident to everyone that hiring is almost at a standstill in America because so many workers refuse to go back to work.  There is no shortage in employees, there is just a shortage of people wanting to work.  Virtually all industries that pay minimum salaries are searching for employees to fill those positions.  One of the major reasons quoted is that the extra $300 a week in Federal unemployment insurance is causing employees not to want to work, and to stay home and collect benefits.  It has already been announced that 25 states will eliminate this $300 increase, effective immediately.  The President also announced that these increases will stop immediately in September of 2021.  The economic effect of stopping these increases in Federal unemployment should be obvious.  If only half of the people currently unemployed now take jobs, since unemployment is unprofitable, the economy should pick up even further.  These are people paying taxes and consuming once again to help the economy grow.  

People ask me all the time how I knew and how I was correct regarding the absolute turn around in the economy during the early parts of 2021.  Basically, I look at the numbers every day to determine whether the economy is moving ahead or sideways.  But if you want to hear information that is more down to earth and easily understood, look at the case of Las Vegas, Nevada.  For the month of April their weekend occupancy in their hotels was 83.5%.  In January, that weekend occupancy was 48%.  During the month of April there were 2.9 million air passengers coming into Las Vegas.  In the month of January there was 1.5 million.  Most importantly, during the month of April the unemployment in Nevada was 8%.  During April of 2020, the unemployment in Nevada was 29.5%.  As you can see there is a real-world increase in the economy happening overnight.  

I happened to fly to Florida over the Memorial Day weekend and can report that the airports were completely crazy on Memorial Day.  There were lines to get into restaurants lined up down half the corridors with passengers.  There was a shortage of rental cars in both markets and the airport appeared to be exactly at the same level of capacity that it was prior to the pandemic.  I flew quite a bit during the pandemic and can report walking into Tampa International Airport at seven o’clock at night and there not being one single passenger other than me.  This most recent trip, the airport was virtually at capacity of people trying to catch flights out of Tampa.  

DeNay visiting the incredible
 Van Gogh exhibit

Another common reason I hear people will not invest in the market is that the market is too expensive.  One of the things I that I try to do with potential investors is ask them how they have determined that the market is too expensive.  Well basically they read what is quoted in major publications and believe those facts and figures to be accurate.  But one of the things misunderstood by the investing public is that if the price of stocks are at a certain level today, but earnings continue to go up, doesn’t that mean that prices will be cheaper in the future?  As I have often said in these postings, the most important component in pricing stocks is the level of earnings of these stocks.  At the current time, earnings are exploding to the upside and the public does not seem to get the point.  It is now being forecast that earnings from the period from May through December of 2021 will increase a dramatic 23% higher from where they were in May.  If earnings continue to increase, as I suspect they will, stocks will continue to get cheaper.  Why would you not participate in this increase when we absolutely know it is occurring all around us?  

One of the major concerns of the investing public has been the pandemic and the spread of COVID.  Maybe you haven’t noticed that COVID infections are down close to 90% of what they were six months ago.  In the entire Unites States yesterday there were only 11,000 new cases.  Deaths from COVID are falling dramatically and now average around 400 a day as compared to several thousand six months ago.  If we could encourage the rest of Americans to get vaccinations, heard immunity could be reached this summer.  Already 63% of Americans over the age of 16 have now been vaccinated at least one time and the number of vaccinations is going up roughly at one to two million a day.  It is very clear that the vaccinations are stymieing the spread of this terrible virus.  Correspondingly, as cases go down the public is out again spending all their accumulated resources.  Given the fact that they have not been able to spend over the last 14 months, you are seeing an explosion in hotels, rental cars and virtually any type of lodging on the beach.  

This upward explosion of the economy has occurred without the new Federal money that is being discussed to spend in Washington.  At the current time, Congress is considering an additional $4 trillion of Federal stimulus in the way of infrastructure type changes.  This would provide funds for additional roads, highways, bridges, dams, etc.  While all those things are clearly needed, dumping all that money into an already overheated economy will only make the shortage of commodities worse over the short term.  It is my opinion that Congress will go slow with these increases, and we will not see them implemented until much later in the year 2021.  

Jodi Dufresne, 36-year client, enjoying
 her horse on a spring day

So where do we really stand on the economy and exactly what does the future hold? While no one can truly predict the future, we do have some evidence of exactly where we stand.  The Federal Reserve of Atlanta makes a projection of future GDP growth based on their internal models.  Currently they are forecasting an increase of GDP for the second quarter at 10.3%.  The entire Federal Reserve is forecasting the economy in the U.S. for the entire year of 2021 to increase above 7%.  If we were to end the year with a 7% increase in the economy that would be the best yearly increase since the Ronald Reagan years.  There is no question that the economy is coming back in a big way.  We all see it every day around us and just like I predicted, the increase will be substantial and long-term.  

In circling back to the original reason for writing this blog, I am questioning why people will not invest all the cash they are sitting on.  After a dramatically higher year in 2020 and a great start to 2021, everyone should consider investing their cash that is earning nothing for long-term results.  We now know that the three components of higher stock prices are firmly in place.  The three components of higher stock prices are interest rates, the economy and corporate earnings.  The chairman of the Federal Reserve, Jerome Powell, has confirmed that he has no intention of restricting the economy or increasing interest rates prior to 2023, which is a cool 18 months from today.  We know based upon the information presented above that the economy is totally on fire.  Businesses today are dealing with the exact opposite that they dealt with over a year ago.  Corporate America is trying to hire employees, but they cannot do so.  Everywhere you look, employers are seeking employees but cannot fill those positions.  

Josef Martinez, Morgan and Kari 
catching a Braves game

These trends are a clear indication of the strength of American corporations since they are now hiring rather than laying off employees.  Also, we know that corporate earnings are dramatically increasing and even the pros are forecasting an increase in earnings in 2021 of greater than 20%.  There are many forecasters that think in the last half of 2021, corporate earnings will be even higher.  It is a fairly conservative forecast that the earnings will be higher given all of the new employees that have gone on the payroll in the early 2021.  In addition to the prior Federal stimulus, if the government continues to give out free money to Americans and businesses, we expect the economy to grow even faster and bigger.

So, my forecast for the future looks like an economy that will continue to grow, earnings that will continue to increase and interest rates that will be stable.  That is the trifecta of positive economic data that will lead to higher stock prices.  There is absolutely no question that the concern of the Federal deficits will increase inflation.  However, my assumption is based on history that the increase in inflation is years away rather than months away.  We also know that eventually the Federal Reserve will have to increase interest rates to slow down an overstimulated economy.  Once again maybe years from now, but not months from now.  As we go forward to the summer and more and more Americans become vaccinated and corporate travel and recreational travel doubles, you will see corporate profits unprecedented in modern times.  All these positive economic effects will have a negative effect on bonds, but a positive effect on stocks.  

There has been a dramatic change in the investing of growth stocks in the last part of 2020 and the first five months of 2021 as there has been a transfer to value stocks due to the turnaround in the economy from recession to expansion.  However, do not give up on the growth segments of investing.  The growth companies such as the large tech companies are recording profits unprecedented in American commerce.  All of the positive economic events represented above will only increase those profits, not decrease them.  While values stocks are certainly rallying in the first part of 2021, I see a shift back to growth this summer and an expansion of growth for the rest of the year.

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

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, May 28, 2021

Memorial Day 2021

In observance of Memorial Day, Rollins Financial Advisors, LLC will be closed on Monday, May 31st. Please note that all major U.S. stock exchanges and banks will also be closed in honor of those who died while serving our country.

Our office will reopen on Tuesday, June 1st at 8:30 a.m. If you need immediate assistance on Monday, please do not hesitate to contact our staff via email.

Take time to celebrate, honor, remember, and have a safe and wonderful weekend!

Best Regards,
Rollins Financial 

Wednesday, May 12, 2021

“Who You Gonna Believe, Me or Your Own Eyes?” – Groucho Marx

From the Desk of Joe Rollins

I know I have used this famous Groucho Marx quote in many of my postings, however, I find it particularly compelling at this particular time.  It is hard for me to imagine that a great many Americans cannot see the explosion of the economy that is occurring around us.  I guess it is influenced by the overwhelming negative attitude of Washington and the continuing flood of cash into the economy from our lawmakers.  Of course, that will lead to short-term positive trends, however clearly long-term negatives. 

Ava and Byrdie catching a 
 Braves game – Braves won in 12

In this posting I want to give you the facts and not the fiction.  I recently had a client tell me that he did not like reading my newsletter since all I did was express positive thoughts.  I guess I am guilty of the obvious.  However, as I pointed out to him, the S&P Index of 500 stocks has had positive returns in 16 of the last 18 years.  I also pointed out that when it was down 37% in 2008, it was followed by an increase of 26% in 2009 and 15% in 2010, making back most of the losses.  In 2018 the market was down 4%, but up 31% in 2019 and 18% in 2020.  If you had odds of 16 chances in 18 to double your money in Las Vegas, I rather suspect you would take those odds any day. 
I want to cover so many things that indicate the strength of the economy.  The evidence is all around us and if you do not grasp the facts, you may miss one of the greatest buying opportunities of all time.  Before I can get into all those interesting items, I must report on the month of April which was quite an excellent month.  For the month of April 2021, the Standard and Poor’s Index of 500 stocks was up 5.3% and up 11.8% for the year in 2021.  The one-year performance on that index is a cool 46%.  The Dow Jones Industrial Average was up 2.8% for the month of April and up 11.3% for the year 2021.  The one-year return on that index is 42%.  The NASDAQ Composite was up 5.5% during the month of April and is up 8.6% for the year 2021.  The one-year return on that index is 58%.  Just to give you a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 0.8% for the month of April, yet it was down 2.7% for the year 2021.  For the one-year period ended that index had a negative return of 0.5%. 

As you can see from the above analysis, the lowest return for any of the major indexes for the one-year period was the Dow Jones Industrial Average which was up 42%.  Compare that with the bond index, which was a negative for the one-year period then ended, and you will see the divergence that is occurring between stocks and bonds.  Anyone not recognizing the underperformance of bonds will probably continue to lose money for the remainder of 2021, which is sad given the upward potential other asset classes hold. 

Lucy and Eddie Wilcox after
 the Girls on the Run 5k

As I predicted in the last several postings, the economic explosion in the United States is just beginning.  What we are now seeing are the early stages of an economy unlike any we have seen since World War II.  The GDP growth for the 1st quarter was a very high 6.4% and based upon the projections of the Federal Reserve, this year should generate a total GDP growth of 7.2%.  Take into context that growth percentage would be the highest since 1984 when Ronald Reagan was President.  Also remember that in 1984 we had basically come out of recession from the previous three years and that jump in GDP was somewhat prevailed by lower tax rates and reduced oil prices in the economy.  The GDP growth in 2021 is not a reflection of a jump back from a recession, but clearly an explosion of printing money by the Federal Reserve and turning that money over to the average consumer. 

The evidence as to this explosion is occurring everywhere around us.  If you are unaware of the shortages in the economy, you really have not read current financial news.  The automobile companies are reporting that they have cut back production because they do not have enough semiconductors to build a car.  Take into context that virtually everything we buy nowadays has semiconductors and the production around the world is not adequate to keep up.  That tells you the public is on an unprecedented buying spree. Currently, Home Depot has no dishwashers, refrigerators or washers and dryers available for delivery.  Their latest indication is that it may be October before they are resupplied.  Just when exactly have you ever known Home Depot to not have refrigerators available? 

Even more distressing is that contractors are reporting that they have no 2x4’s of lumber.  How can the housing boom continue without 2x4’s?  Those contractors lucky enough to find 2x4’s are noting that the price is double what it was 6 months ago.  I am also sure that you have read that home sales are beyond ridiculous at the current time.  It is reported that homes selling in Atlanta oftentimes will get double digit offers to purchase above the asking price.  The days of taking the asking price and discounting it 10% are long gone.  In fact, for a decent house inside the perimeter of Atlanta, to stay on the market more than one day, there must be a serious problem with the house.  Now how could any potential consumer not understand these shortages and not understand how good the economy will be if all these shortages occur? 

The numbers for April were nothing short of spectacular.  Consumer income during the month of April was up over 20%.  Yes, I understand a great deal of this was due to the stimulus payments paid to most anybody who asked for them, but it also had a lot to do with more people going back to work.  What was more interesting to me was that retail sales for the month of April were up 21.3% over a year ago at the same time period and the savings rate of consumers set an all-time high of 21%, as compared to a  normalized savings rate of 7.5%.  So, in summary, people were making more money, but were also saving more money and clearly this saving of money bodes well for future spending by consumers. All this explosion in the economy has to be taken in perspective of the actions of Congress where they have already distributed almost $4 trillion in stimulus money and are desiring to distribute another $4 trillion in the upcoming months. 

Mitch Musciano-Howard accepting
 his Varsity Letter for soccer

While certainly things on that list of Federal expenditures are needed, the vast majority of this amount will do nothing but create hyperinflation in the United States.  If you take an economy that is already scalding hot and you flow an additional $4 trillion of liquidity into that economy, almost assuredly the economy will overheat leading to adverse economic effects of inflation in the coming months.  Just exactly what they are looking at in Washington defies the ability of someone trained in economics to actually understand. 

Make no secret about it, the way the Federal Reserve has created all this money to be distributed is by using their very efficient printing presses to produce more cash.  While the flooding of the economy certainly has positive economic effects over the short-term, if you overheat the economy and if interest rates start to go up because of the overheated economy, the long-term trends on $8 trillion of manufactured money would be significantly bad.  I do not want to imply that negative aspects will occur in the next day, week or month, but certainly 10 years from now we will all feel the burden of repaying debt that was created today. 

I told you in prior postings that you should be extraordinarily positive with the progress that has been made on vaccinations in the U.S.  I indicated that you were likely to see by the middle of the summer the ability to reopen the economy virtually everywhere.  I was certainly wrong in that projection.  That day is here today, and it is happening.  I went to the Atlanta Braves game last night and the stadium was at full capacity.  There was no social distancing occurring, but the numbers support that confidence by consumers.  For all the people in the United States over the age of 18, 43% are now fully vaccinated and another 57% have already had their first vaccination.  Everybody wonders why this percentage is not higher.  Remember that there are no vaccinations given to anyone under the age of 18.  However, beginning next week children between the ages of 12-17 will begin vaccinations, which should run the percentage up dramatically over the next few months. 

Ava and her bunny sharing 
a delicious snack 

But even more encouraging are the U.S. citizens above the age of 65.  A remarkable 83.5% of those U.S. citizens over age 65 have already had one vaccination.  Also remarkable, is that 71%  of U.S. citizens over the age of 65 are fully vaccinated at the current time.  We are going to see an explosion of the economy as the U.S. citizens feel confident that the vaccinations will allow them to travel and spend money once again. 

People think it is remarkable that the amount of increased savings during April was 21%, however, do not forget that people have not been allowed to travel and eat out for the last 14 months. If all those restrictions are lifted you will see an absolute explosion of spending throughout all levels of the economy and, in fact, we may be seeing it right now with all of the shortages that are occurring.  

Almost every day I hear from an investor asking how the stock market can keep going up because stocks are clearly “overvalued.”  I wonder exactly where those investors are getting their information.  If we all agree that stock prices are based on earnings and earnings are going up, there is a high likelihood that stock prices will continue to follow earnings.  But have you or has that investor looked at the current increase in income?  For the first quarter of 2021, the high-tech companies such as Apple, Facebook, Google, and Microsoft reported income that was nothing short of breathtaking.  The numbers were absolutely staggering in their magnitude and shattered all expectations as to future income. 

DeNay visiting scenic Roswell, New Mexico

It is now anticipated that net income as we go forward for all S&P 500 companies will be 25% higher by the end of the year than they are today.  That almost seems to me to be a conservative estimate given the avalanche of cash that is going to be spent by the consumers in the next nine months.  Once these consumers feel comfortable that their job is protected and they do not fear from the COVID pandemic, they will once again travel, eat out in restaurants and spend money on consumer goods.  We as investors do not really care what happened last year, that is in the past.  What we want to know is what is going to happen in the next couple of years.  It is fairly clear to everyone that is reviewing the information that the next couple of years should bring a substantial increase in profits due to this pent-up demand that is now going to be released on the American economy.

It almost seems comical to me that in the 1970s, ExxonMobil reported a quarterly profit of $10 billion and the congress of the United States was outraged.  In fact, there were calls at that time by Congress to break up Exxon and to impose a windfall of profits tax on them due to their higher profits.  This last quarter, the company Google reported net earnings that were double Exxon’s quarterly earnings and there was not a whimper out of Washington.  In fact, when you think about it, Exxon spends substantial sums of money to extract oil from the ground, refine it and sell it to the public.  Google sells no products to speak of and collects money at an invisible way by key stroke.  Today the super large technology companies dwarf the oil companies and are likely to report substantial profits that will stagger the investing public and embarrass the older companies like Exxon and GE. 

It must be spring – the roses are
 blooming at my house

What is interesting about this time and the reaction of the Federal Reserve is the distinction between what happened in 2008 and what happened in 2020.  You remember in 2008, we reached the point where all the banks were virtually going to fail, and the financial backbone of America was in danger.  The reaction to that by the Federal Reserve was to bail out the banks and the brokerage houses and other significant financial businesses to protect the general public.  But the Federal Reserve did nothing whatsoever to try to help the individual consumer.  Their assumption was if they help the banks, the banks would help the public.  They could not have been more wrong.

It has been reported by many that even though the banks received over $300 billion in Federal TARP subsidies they did not go out and lend to the consumer.  In fact, they used that money to shore up their own balance sheets and to compensate their people.  It is little known, but true, that virtually all the banks paid 100% of their money back to the Federal Reserve.  In fact, now the reports indicate that TARP was a roaring success for the government.  The Federal Reserve actually made more money on this plan than it cost them.  However, it cost the American public quite a lot more.  There was huge unemployment, many people lost their jobs, and it would take years to recover from that recession.

In comparison, what occurred in 2020 was the exact opposite.  During March and April of 2020, the Federal Reserve did not bother with helping the banks, but went directly to compensate the individual citizens in the U.S.  By virtue of throwing $4 trillion into the economy, they instantly turned it around.  As I pointed out in those postings in 2020, if you do not realize what $4 trillion will do to the economy, you have not been around economics very long.  By flooding the economy with money, the Federal Reserve created an economy supported by Federal money that only lapsed into a recession for a few months in 2020.  Now, less than a year later, we are looking at an economy that is virtually exploding.  The Federal Reserve Bank of Atlanta is now forecasting GDP growth in the second quarter at 11%.  Short of wartime, this country has never had such high GDP growth. 

What is bewildering about the reaction of Congress today is that they just cannot be satisfied with the good work that the Federal Reserve has already done.  They are insisting that they need to throw another $4 trillion into the economy, which as pointed out above is likely detrimental.  Almost daily we hear speeches of how many people are unemployed and the terrible economic circumstances of the unemployed.  As we all now know, we could quickly solve the unemployment issue if we just reduced the subsidy by the U.S. government.  We have paid unemployment greater than what was necessary during the crisis, which has continued almost beyond any time of realistic need for the money.  Virtually every employer that I know cannot hire employees to work at their business.  The golf course that I am a member of had to close two of its three restaurants because it does not have enough employees to work.  Everywhere you go you see help wanted signs and employers with the inability to hire workers.  That is not an economy that is represented by high unemployment.

DeNay hoping to spot some 
UFOs in Roswell

Not only did the Federal government pay too much in the way of unemployment, most recently it has been determined that the first $10,000 of unemployment is tax-free for many recipients.  It is estimated by the Bank of America economist that the unemployment today would be equivalent to a salary of $33,000 in the private sector.  Most of the hospitality workers do not make that much money anyway and therefore it is better for them to not work than for them to give up the governmental subsidy.  While it is true that there are still eight million U.S. workers not working today, you must wonder if they cut unemployment, a great number of those would return to work immediately.  As of today, there are already two states that have totally rejected Federal unemployment subsidy not because they do not like receiving Federal money, but because there is such a shortage of labor in their state.  They are hysterically trying to get people back to work by cutting the unemployment benefits.  There are 8 million open jobs in the U.S.

A lot of ink has been wasted on the proposed tax increases proposed by the current administration.  Quite frankly, I think there is a high likelihood that I have a better chance of playing shortstop for the Atlanta Braves today than all these tax proposals getting through Congress. I have no doubt that some will, but the majority will not, or they will certainly be modified.  To give you an example of one that is an extreme, the President is proposing that for anyone making a $1 million, the capital gains rate would be equivalent to the ordinary income rate which is roughly 43%.  If you add to that number state income tax, that means on a capital gain that size, you would be paying over 50% tax of that gain.  In my opinion that will never happen.

People have lost sight of the real reason why taxation occurs.  The reason you tax things is because you want people to buy less of them.  Remember we have always overtaxed tobacco, alcohol, and gasoline, the theory being if we tax these items high enough, people will not spend money on them and therefore reduce consumption which will help the economy.  For us to even consider taxing capital is a dangerous precedent.  I thought I would never get to the point where the government is taking actions that are detrimental to the entrepreneurs of the U.S.

There is no question that capital is the secret to why America is the most inventive country in the world.  Have you ever considered that virtually all the software and medical achievements occur in the United States and not in other countries?  Japan and China have proven that they are very skilled workers that can copy U.S. products and produce them well.  Neither Japan nor China have proven that they can develop these products as the U.S. has. The reason that companies can participate and create new products is because of capital.  Sometimes it is private capital and sometimes it is government capital.  In the most recent example, there is no way that these pharmaceutical companies could have developed a COVID-19 vaccine in less than12 months without the government’s involvement. By virtue of throwing billions of dollars into these pharmaceutical companies, vaccines were created within one year that are inexpensive and actually work.  The last thing we would want to do is reduce the ability of entrepreneurship in America by taxing capital to such an extreme level.  While capital gains taxes may go up to something like 28% which is the rate that it was during the Clinton Administration, certainly, to tax at that ordinary income level is not in the cards. 

Marti Musciano-Howard celebrating 
her Varsity Letter and MVP
 award for soccer 

As we gear back up to full production in the U.S., it always concerns me when I hear Washington misstating the facts to prove a political theory.  The most recent example of that is the State of the Nation Address by President Joe Biden.  During the course of his speech he said, “Wall Street didn’t build this country.  The middle class built this county, and unions built the middle class.”  While not surprising, a similar opinion was represented by former President Barack Obama.  Why is the government misstating facts that are clearly easily checked to be incorrect?  I understand political payback and certainly the unions almost universally supported the President in the last election, and he would want to give them due respect - I understand that part of the program.  However, the facts are indisputable. 

Today less than 11% of the U.S. population is covered by union contracts.  And the number of U.S. workers covered by unions previously is even less.  The number of union workers during the 1920s was roughly 5 million.  That number declined to three million in 1930 and almost none of these union jobs were in large U.S. industry such as steel or automobiles.  In fact, most of the union jobs were all held in mostly craft skills that required specialized training to be a part of a union.  Therefore, to assume that labor unions were instrumental in building America, is disingenuous and incorrect. 

As we go into the summer, we have time to sit down with you and review your financial plan.  I anticipate that this year is going to be bumpy with many ups and downs, but the trend is clearly up, and you need to participate.  I believe bonds will not make any money in 2021 and that investment could potentially drag down your portfolio.  However, the biggest obstacle to building wealth today is this over-mounting gush of money that is being held by the public in cash.  I can almost assure you the vast majority of people reading this posting has more than one year of cash at their disposal, uninvested.  If you are talking about a lost opportunity, there it is, just as crystal clear as it can be.  

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, April 13, 2021

Closed for Tax Holiday!

In celebration of what would have been the end of tax season, the Rollins Financial office will be closed on Friday, April 16th. We will take this time to allow our hardworking staff some well-deserved rest and relaxation. We will resume working tirelessly during this extended tax deadline on Monday, April 19th.

If you have a matter that requires immediate attention while our offices are closed, please contact any of our partners:

Best Personal Regards,
Rollins Financial Advisors, LLC

Thursday, April 8, 2021

“It’s Tough to Make Predictions, Especially About the Future” – Yogi Berra

From the Desk of Joe Rollins

Every time I read the quote from Yogi Berra above, I have to nod my head in agreement.  He definitely had a way of simplifying complex subjects.  Predictions are difficult when the facts are unknown and the conditions heading into the future are unpredictable.  We found ourselves in that exact predicament one year ago, in March 2020.  Rarely have I seen as much fear by investors than I saw in that month when the first lockdown occurred.  

At that time, investors were falling all over themselves to get out of the market and into cash, which was earning nothing.  I tried to assure them that the economy would quickly turn around and the stock market would react positively with the economic support of the federal government.  When you throw basically $3 trillion into the economy at one time, that money is going to get spent and is going to create economic activity which will lead to higher profits and higher GDP.  

Ava celebrating winning first place in
 her Figure Skating division

So Yogi, we actually projected that one correctly.  If you look at the time period from March 2020-2021, the S&P was up 56.3%.  The NASDAQ Composite was up 73.4% and the Dow Jones Industrial Average was up 53.8% over that one-year period.  Those types of gains are not normal.  They are extraordinary gains based on extraordinary circumstances.  The one thing we absolutely know when it comes to economics is that money creates spending and spending creates profits.  Remember, the most important driving force in making stock prices go up is earnings. 

As I sit here today reading all the financial information, I am blown away by the positive nature of the economy, yet the negative nature of so many investors.  All around, commerce is returning to normal, yet for some reason there is a high level of skepticism by the public based on fear or unknown economic circumstances that I am not aware of.  I will attempt to cover some of those items as well as some other information that I find interesting.  

As I must provide in all my postings, here are the rates of return for the month.  The Standard & Poor’s Index of 500 stocks was up 4.4% in March.  Year-to-date it is up 6.2% and as mentioned up 56.3% for one-year.  The NASDAQ Composite was basically breakeven at 0.5%, year-to-date is up 3% and for the one-year period is up 73.4%.  The Dow Jones Industrial Average was up 6.8% during March, up 8.3% for the year 2021 and up 53.8% for the one-year period.  Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was down 1.3% for the month of March, down 3.5% for the year 2021 and for the one-year period was up a measly 0.4%.  During the month of March there was this highly publicized conversion from growth into value type stocks.  As you see the excellent month that Dow Jones Industrial had, that is because many of its components are value-related stocks.  I think that will be a temporary shift and as earnings start to come in during the month of April, investors will convert back to growth investments.  

Cameron, 13, enjoying virtual “band class”
 while his parents are at work

Everyone asks me about the so-called axioms of investing - the unwritten rules of traders.  One of those axioms that has been illustrated lately is the concept that if interest rates go up, you sell growth investments.  The theory goes something like this.  If interest rates are going up that means the Federal Reserve is doing so to slow down the economy.  If you slow down the economy, then growth instruments would clearly suffer.  Therefore, one of the axioms that is held dearly to trader’s philosophy is that once interest rates start to go up you must sell growth and buy value-related investments.  

As we all know, axioms sometimes fail because they are not supported by facts.  In this particular cycle, we already had the Federal Reserve telling us that they have no intention whatsoever to increase interest rates until 2023.  We are in a situation now where the economy is exploding with growth and the government keeps throwing gasoline on the fire with new stimulus and governmental spending.  In March of 2020, the U.S. came into that month with a deficit of roughly $22 trillion.  Over the intervening 14 months, if the infrastructure bill is passed we will have added another almost $6 trillion in debt over a one-year period.  If you truly don’t believe that $6 trillion is going to move the economy, then you do not really understand economics.  If the GDP in the United States is $23 trillion this year, but you dispose another $6 trillion worth of stimulus into the economy, whatever the Federal Reserve does to try to slow that down would be a complete waste of time.   

I am not sure where most people get their economic facts, but as we sit here today this economy is getting ready to explode upward.  As we have learned, the most important component to making the economy come back is the vaccinations.  As of this morning, roughly 162 million Americans have been vaccinated.  Based on the last 30 days, we are newly vaccinating 3 million people a day and the simple arithmetic would be that by the end of April we should have at least 250 million Americans vaccinated out of the 330 million population.  I am absolutely positive that everyone will not get vaccinated, but we don’t need 100% to reach herd immunity.  

Reid and Caroline at 
Drive, Chip & Putt

Everywhere you look the economy is picking up.  The Employment Report that just posted yesterday was nothing short of gangbusters.  That report showed that not only was the hiring of new employees paramount, but we also saw hiring in such industries as entertainment, restaurants and hospitality.  You may rest assured those employers would not be hiring if they did not feel safe after vaccination.  

You are getting ready to see a tsunami of spending occur in America.  All the money that has not been spent over this last year for travel, vacations and outside entertainment has accumulated in people’s checking accounts.  It is estimated that today there is roughly $5 trillion in checking accounts waiting on some sort of resolution for the future.  It is my best guess that as we get closer to the summer you will see an explosion of spending unprecedented in the United States for many years.  

It was only announced this week by the CDC that if you have been vaccinated it is safe for you to travel again, yet airline travel is up dramatically over the last few weeks and it is reported in the hospitality industry that vacation hospitality has reached the level similar to that of pre-pandemic.  All of that is interesting but should also lead you to the conclusion that earnings will follow all this money.  If you have the general public taking vacations, flying on airplanes and staying in hotels, it will benefit the hospitality industry, the restaurants and everything in between, which is exactly what is happening today.  

Caroline, Reid and Flat Stanley 
resting in the park

Just so you do not think that I have lost all perspective in connection to basic economics, I will explain my position on the economy. There is absolutely no question that all the stimulus that the Federal government has put into the economy will help businesses put people back to work and help America grow.  It is, however, a wonderful short-term asset, but a very much long-term negative for the U.S. economy.  When the Federal government goes out and prints $6 trillion, at some point someone has to repay that debt.  At the current time, interest rates are extraordinarily low and it does not take a whole lot of money to serve as the debt structure to keep that debt in place.  That will not be the case forever.  While I focus on the positives in this newsletter, I just want you to be aware that all of these positive moves in 2021 will more likely be negative moves in 2031.  However, for now let’s just enjoy this runup of the stock market.  

While there are many states in the U.S. that have already recovered, it is now estimated that there are roughly 1.7 million jobs in the U.S. that cannot be filled due to lack of qualification by employees.  One of the strange coincidences that is happening is with all the federal government funding of unemployment, there is a high disincentive for people to go back to work in lower paying jobs.  If you can make more money at home with unemployment, why would you actually go back to a job that doesn’t pay a livable wage?  It was hoped by many employers that the unemployment subsidies would run out but with the newest stimulus package, even those employment benefits have been extended to the end of 2021.  

But it is fairly clear that some states are already back to normalized rates.  In Florida, only 4.7% of their population is unemployed.  Nationwide unemployment is at 6%, but to clarify there are still 8.4 million less jobs than there were at the start of the pandemic.  Even the state of Georgia now has unemployment of 4.8% and every client I know is seeking new employees but cannot find them.  Recently our firm advertised for a CPA for our company and we did not get even a single resume of a qualified CPA looking to change work.  If you get into the more technical areas, the number of people that can fill these jobs with expertise are just not available.  

There is no question that certain states are actually falling well behind this unemployment report.  You could argue that it is self-inflicted, however, I guess we will never know exactly the reason.  As you compare Georgia’s unemployment report at 4.8%, California is 8.5%.  If you compare Florida’s unemployment report at 4.7%, New York is at 8.9%.  Therefore, much can be done to bring the economy back to normalized, but it is these larger states that will have to do the most.  It can clearly be argued that roughly one-half of the states are already back to pre-pandemic levels, while the other half are dragging behind.  

Ava showing off her favorite horse
 “Why the long face?”

So the general consensus is that if you throw $6 trillion into the economy, by necessity you will have to create inflation.  Yes, it is true enough that in recent weeks the long-term interest in the 10-year treasury has gone up to 1.7%.  At the current time, that 10-year treasury rate of 1.7% is equal to the dividend rate of the S&P 500 index.  Many would argue that numerous investors will leave the 500 index and invest their money in 10-year treasuries because the income component is the same.  I find that assertion to be absolutely ridiculous.  

One of the reasons why bonds have returned negative rates of return, as illustrated above, is because interest rates are moving up and will likely move up further.  Also, I do not believe that a 1.7% treasury rate will actually draw money out of the stock market to buy that bond yield.  There will be a time when interest rates will be high enough where money that is currently in the stock market will be drawn into the bond market.  However, I think we are a long way from that point.  So therefore, should we fear inflation as we go forward in the current environment?  

As many of you know the Federal Reserve sits down every six weeks and makes projections of the future economic circumstances.  Remember these are very conservative members that make up the Federal Reserve.  They are not one to exaggerate or even take extreme positions on any economic event.  At the most recent meeting of the Federal Reserve each member was asked to vote relative to their projection on GDP growth and in the United States for the year 2021.  As unbelievable as it sounds, the average projected GDP rate by the Federal Reserve was 7.2% for this year.  If you take that into consideration, that number is so over the top as to be clearly unbelievable.  

The last time the United States enjoyed GDP growth of that rate was in 1984 when Ronald Reagan was President.  Those of you that lived through that period know that the first two years of the Reagan Administration were recession years designed to break the back on inflation, which it did.  As the economy turned in 1983 and 1984, we enjoyed a period of hyper-economic growth, but it was more a reflection coming out of the economy than anything.  We are not in that situation today.  While the economy was bad during the pandemic, it could be argued that we only had recession for two months during that time frame.  If the economy actually generated returns of 7. 2%, that means a large portion of this economic growth will occur at the end of 2021.  All this falls in place with my projections above.  Six trillion creates a lot of economic activity.  

Ava reveling in the snow
 in Akron, Ohio  

As we get into the summer months, the fear of the pandemic will ease with the vaccinations which have proven to be extraordinarily effective.  As more and more Americans utilize their capital, to travel, visit their grandchildren or just go on vacation, it will improve the economy everywhere.  Already we are suffering through severe shortages of components in the supply line to produce products.  Over the last few weeks, the automobile companies have been closing production because they cannot buy enough semiconductors to build cars.  Think of that term for a second.  With all the semiconductors produced in the world we cannot buy enough to keep automobile production running.    

We hear about the major docks in California and along the Eastern Seaboard where ships are lined up to get in, sometimes having to wait weeks to be unloaded.  I happen to know someone who works on the docks in Los Angeles, and they are working 24/7 trying to unload the boats.  Why are all these boats coming to America at this time?  It is a very simple concept - money draws products and products go where money treats it best.  Already the economy is turning to a consumption economy and is growing so quickly we cannot even supply the products.  If you assume that the consumer is 70% of GDP, all this plays into a higher GDP rate of 7.2% for this year.  

So here we have the situation where the economy would be hard pressed to be in better shape.  It is fairly clear that the corner has been turned and with the excellent effectiveness of the vaccines, more and more people will feel comfortable with traveling and spending more money.  If all of that is true, which the evidence is overwhelming that it is, the byproduct of all this spending will be higher earnings which will bring higher stock prices.  

Cameron heading back to school
 after one very long year

If the government had not already provided enough capital, now we are discussing a bill that would provide infrastructure to Americans.  Who could possibly not be for better roads, highways, and airports?  That is almost as good as American pie. However, it is a very precarious time to be putting more stimulus and more debt into the American economy.  In reading the most recent bill proposed by the President, it only allocates about $500 billion a year for these types of repairs.  In respect to a bill of $2.3 trillion, that is relatively a small amount.  It might be worthwhile to postpone that passage of the bill until the economy is more stabilized, probably in a year from now.  

So those who would argue that the government has spent too much money would have a stable platform, however, no one will ever know because Yogi Berra and I cannot forecast it.  As an example, in 2008, when the economy clearly collapsed the government stepped in and provided support for the banks, but not the general public.  That was a very painful recession that lasted for two years and many people got hurt.  

Reid and Caroline waiting patiently
 to tee up at Augusta

During 2020, the government stepped up immediately and funded the economy with $3 trillion, which brought back the economy after only 90 days.  I had clients call in during this timeframe and ask my opinion on how long I thought this recession would last.  I continuously quoted a 90-day time period for this recession, which turned out to be pretty close.  Not that I was any better than anyone else forecasting the future, but I did know that if you throw $3 trillion in the hands of consumers, it would create profits.  

So, the argument could be made that the government is injecting all this money into the economy, which will clearly create inflation.  No one wants inflation like we had in the 1970s, where inflation was growing double digits per year, however the last thing you want in this country is deflationDeflation is much more difficult to come out of than inflation. If you study the 1930s in America and the Great Depression, it was principally caused by deflation more that any one item.  Deflation is the most difficult of all economic events to satisfy.  You may recall that in the 1930s, we suffered through deflation and 25% unemployment in the United States for over 11 years.  Not until the U.S geared up for World War II was the back of deflation broken.  

In summary, the economy is actually quite good and anyone that tells you otherwise really has not been reading the current numbers.  As America wakes up and gets on the road again in the coming months, economic activity will accelerate.  As I projected earlier, this economic activity will lead to more commerce and higher earnings and almost assuredly higher stock prices.  If you are not invested, now is the time without question.  

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, February 10, 2021

There Is Light At The End Of The Tunnel ... And It Is Not A Train Coming

From the Desk of Joe Rollins

There is so much good news to report this month that I am bewildered by the overall tone of the news you read every day.  I guess it has become so commonplace to be negative that people just cannot see the good from the bad, so this month I would like to talk about things that I believe you would be interested in and my projections regarding the U.S. economy.  I will discuss the extraordinarily good news regarding housing in the U.S, the pent-up demand that will come at the end of the pandemic and will stun you with the current earnings of Big Tech in America today.  I will also give you a heads up on the inflation that is coming and its causes, and the extraordinarily good news regarding the economy.  It is hard to keep down the excitement as we see the economy shift from a total shutdown to accelerating and growing again. 

I also must discuss the facts regarding the pandemic and what the scientists told us.  All of this affects the economy in a way that should get you excited about the upcoming year.  We finished the year 2020 with one of the best financial years of all time.  A gain of 18.4% is certainly something to be proud of in a pandemic.  Given the extraordinary circumstances of 2020, who would ever have expected that the stock market performance could be one of the best.  I have so much to report on and so little space, I guess I need to get started.  

Ava on her first day of school in 2013 and in 2021 – they grow up so fast!

As I always do before discussing more interesting things, I need to give you the scorecard for the stock market for the month of January 2021.  The S&P 500 was down 1.0% for the month of January, however its one-year return is still excellent at 17.3%.  The NASDAQ Composite was up 1.5% during January and its one-year performance is at 44.1%.  The Dow Jones Industrial Average was down 2% for the month of January, but up 8.5% for the one-year period.  Just as a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was down 0.7% for the month of January and has a one-year return of 4.9%.  

It is hard to believe that we are not even at the one-year anniversary of the true start of the pandemic.  So much has happened over the last year, it is hard to believe it has only been 12 short months, seems much longer.  As I wrote in the first quarter of 2020, to solve the issue of the pandemic we need to turn loose the American Spirit and let corporate America solve the issue of this current virus which turned into a pandemic.  In this short one-year period, we saw our Federal government step up and fund research that led to vaccinations being approved at a record pace.  Even though we are not at the one-year anniversary, during this one-year period we not only created and tested a vaccine, we rolled it out to many Americans.  

As I write this posting, there have been 42.4 million Americans already vaccinated for the virus.  In addition, there have been roughly 27 million cases in the United States.  With a combination of the two, we have roughly 69 million Americans that already have some form of protection from the virus continuing to spread.  Whether you realize it or not, just a short 6 weeks have elapsed since the first vaccination and we already have close to 20% of the U.S. population that has some sort of protection from additional spread.  This is a remarkable rollout by anyone’s definition.  Whatever the newspapers and television media are talking about – I have no idea.  

But the best part is only beginning.  This morning Pfizer announced that they were increasing their production of vaccines by a full 50%.  Johnson & Johnson will receive their emergency approval of their vaccination this month.  By some accounts, there are roughly 15 additional vaccinations in the final stages of approval.  We will have more than enough supply; the implementation will be the challenge.  What is even more fascinating to me is that, as of today, there are 20 million doses of the vaccine sitting on shelves that have yet to be administered.  We are currently vaccinating at a rate of 1.5 million people per day.  This will be a low point as we roll out vaccinations in the coming weeks to the common man in drug stores and then retail stores.  It is now estimated that 40,000 drug stores and retail stores have applied for licenses to administer the vaccination in the coming weeks.  As we provide the supply of vaccinations to the drug stores, I fully expect the number of vaccinations a day to increase substantially.  

Caroline Schultz (7) celebrating her birthday weekend

From March 1st until June 30th, there are 122 days.  If you assume that we can continue to vaccinate 1.5 million people at a minimum per day, that is another 183 million vaccinations to be added to the ones already completed.  It is fully conceivable that by June 30th we will have vaccinated nearly everybody in the U.S. who actually wants to be vaccinated.  Whenever that day comes, you will see such a rush of spending and increase in commerce, unlike anything we have seen in this country in many generations.  It is going to be exciting!  

Notwithstanding all the negative news you hear about the vaccine and its rollout, no matter how hard you squint, or what angle you look at it from, the coronavirus vaccinations are an overwhelming triumph.  You want the actual proof of their success?  With only 20% of the U.S. population currently vaccinated, the number of new cases in the U.S. over the past two weeks is down 35%.  There are some states now that have only a few thousand active cases.  For all the things that have gone wrong and for all of the criticism levied on the Federal government over the last few years, the vaccinations themselves have shattered even the most ambitious expectations.  Not only has the American Spirit pitched in to solve a pandemic in record time, it also bodes well for the future where vaccinations can be created, tested and implemented over a short period of time.  Unquestionably, this will lead to a healthier world population due to the experiences learned over the last 12 months.  

It is already true that the economy is improving dramatically.  The unemployment report for the month of January indicated an unemployment rate of 6.3%.  There is no question that there are still 10 million people unemployed, but the government has funded these unemployed with lucrative benefits of unemployment and continues to extend those unemployment benefits well into 2021.  As the vaccinations roll out in the spring, you will see restaurants reopen and retail stores get back to full employment.  It would appear to me that employment should move up dramatically in only a few short months from where we sit today.  

Caroline enjoying her sweet birthday treat

Every day I read about the pandemic and all the various mutations of the virus that could bring down the world economy.  I am not exactly sure where these people get their facts since the scientific evidence, overall, is quite overwhelmingly positive.  It is now estimated by some that the GDP in the United States will exceed 7.5% for the year 2021.  That rate of growth has not been accomplished for decades in the U.S.  What we now know from prior investing experience is that the one sure-fire reason that the market will go down is due to a recession forthcoming.  Nothing that I have indicated so far would call for anything close to a recession in the year 2021.  

I read with great interest that so many of the experts were forecasting the demise of Big Tech in America.  Surely since the stocks had run up during the year 2020, we would see a gigantic pull-back in the performance of these large companies.  After reviewing the fourth quarter earnings of the largest tech companies, it was almost breathtaking.  Just look at the quarterly net income of Big Tech.  During the fourth quarter, Apple earned a net profit of $29 billion.  That was not gross, that was net.  Add to that Google and Microsoft both had net profits of $15 billion for the quarter.  Lowly Facebook, that sells no products only advertising, had an $11 billion net profit.  And Amazon clocked in with a profit of $8 billion.  By any definition, those performances were beyond extraordinary.  

Take into comparison the former most profitable company in the world, ExxonMobil, which had a loss in the fourth quarter of 2020 of -$20 billion.  At one time, it was thought that Congress was going to create a windfall profit tax because Exxon was making too many profits.  It is now known that Apple makes more profits now than Exxon ever dreamed about in its heyday.  

If you want good news about your home, then you do not have to look very far to get it.  During December, existing home sales are up 22%, but more importantly, the average home price had increased a cool year-over-year at 12.9%.  If you think about it for a second, an increase of almost 13% of the value of every home in the United States is a staggering amount of money.  New home sales were also strong, going up 19% with the median price increasing by 8%.  Keep in mind, the consumer’s net worth is directly linked to the value of his real estate.  

As the value of someone’s home goes up, the value of their net worth increases, and their disposable income is freed up for consumer goods.  This increase in housing prices bodes well for future spending by consumers.  Now it can be said that home prices are directly attributable to the low interest rates we enjoy today, and I am sure that is true.  However, never before have we seen interest rates stay this low for such a long period of time.  You can attribute that directly to the Federal Reserve’s stated intent of keeping interest rates low for the next two years.  

As we change administrations, you have the unwelcome influence of government, which is a negative in many aspects of our economy.  Newly elected President Biden during his first week in office made moves to restrict the exportation and drilling of oil in the United States.  By immediately canceling the Keystone Pipeline and revoking leases on the drilling of oil on Federal land, we all know (including him) this will lead to higher oil prices in the future.  In fact, in a period of less than three weeks, the price of oil has gone up $10/barrel due to these actions.  Part of the increase, I am sure, relates to the anticipated stronger economy coming this summer, but when you restrict exportation and drilling coupled with a stronger economy of people wanting to travel after the pandemic, certainly you will see higher oil prices.  

There is not a more critical component of future inflation than the price of oil.  The price of oil figures into virtually every aspect of every item we purchase.  Due to transportation and the cost of manufacturing, this increase in the price of oil will be passed along to consumer goods, which almost assuredly will increase inflation.  

Ava and Josh at the Statue of Liberty

So, what we are already seeing is that an increase in interest rates is taking place.  The 10-year treasury now is up to 1.017%, considerably higher than it was less than 90 days ago.  The 30-year treasury is still trading below 2%, but it is nearing that level for the first time in over one year.  As explained here many times before, this increase in inflation will diminish the return on bonds, since they move inversely to the increase in these rates and very likely will provide a negative rate of total return for bonds for the year 2021.  As I have predicted before, there is a high likelihood that cash will outperform bonds during this year of 2021.  

We all understand the concept of political payback and we understand why President Biden moved quickly to support the environmental cause of many of his supporters.  However, if he had moved more slowly and announced these changes to come up in the future, we probably would not have had this shock of inflation so quickly.  The real danger, of course, is that if inflation starts to gain momentum, we could see the Federal Reserve change its theory of prolonged low interest rates and begin to increase them again.  

If, by chance, the Federal Reserve started increasing interest rates, prior to their stated timetable of constant rates through 2023, that would certainly have a negative effect on the U.S. economy.  Oil producing third world countries around the world must be applauding President Biden’s actions.  The super-producers in the Middle East and Russia will receive instant gratifications of higher rates with these actions in the U.S. with President Biden doing more to support the economy in Russia in one week than President Trump did in four years.  

What we know about the pandemic now, is that it was a terrible tragedy for the United States - for both the people who got sick and died as well as for the U.S. economy.  What is fascinating to me, is the amount of conflicting information we received at the beginning of and during the process of the pandemic.  You will recall, there were projections that we may lose as much as 5% of the population who would die from this pandemic.  That would have been a death rate close to 15 million total.  In the United States, we have tragically lost 473,000 deaths due to the pandemic, although many of those deaths were inevitable due to old age and ill health.  But certainly, nowhere close to 5% of the population.  

Partners Danielle Van Lear, Robby Schultz, 
Joe Rollins and Eddie Wilcox 

We were told that if you lock down your economy, you will prevent the spread of the virus and on the other end of the lockdowns, you will isolate and come out quicker.  Just take the case of New York, where they proved the opposite to be true.  Even though New York went through an extended period of lockdown, they have one of the worst records in all the United States.  They are still mostly on lockdown today.  In the process of shutting down their economy, they have destroyed their hospitality industry and have crippled their tourism business, maybe forever.  And to what end did they accomplish this draconic shutdown?  

New York has the largest number of deaths of any state in the union with almost 45,000.  The state of Georgia, which has roughly 50% of the population of New York State, has lost a tragic 15,000 lives, but has a much better record than the state of New York.  Florida which has a larger population than the state of New York, which did not put its economy through long periods of lockdown, had only 28,000 deaths as compared to New York’s 45,000 deaths.  So, with the expressed desire to shut businesses down, they have accomplished virtually nothing positive in fighting the pandemic.  Today Disneyland in California is still closed while Disney World in Florida has been open for months.  

The poster boy for doing what is right during the pandemic was Governor Andrew Cuomo, who argued that he needed 40,000 ventilators, which he never used to fight the pandemic.  Yet, his state has the worst record of any state when it comes to controlling the pandemic.

None of us know really what the long-term effect of children missing an entire year of school will be.  My 9-year-old will go to her first class on February 8th.  I guess you can say that this year was a total waste of her education, since clearly sitting in front of a computer for seven hours a day was not the equivalent of in-person educational instruction.  That is a year of education that can never be recovered.  

There are many lessons we have learned over the last year that hopefully will be beneficial in the future.  What we now know is that large, enforced shutdowns were not the answer and clearly should not be in the future.  But we have learned lessons regarding medicine that will benefit all of us going forward.  In a record amount of time, we have created vaccines that not only work but are relatively inexpensive and are highly efficient.  It is now believed that these vaccines can be adapted and used for many things which can be highly beneficial to future potential pandemics.

Partner Robby Schultz with 35-year client Mary Trupo

I just do not know how you can get more excited about the economy going forward.  The economy is already building steam and it is highly likely that by late spring anyone who wants to go back to work would be allowed to do so.  The projections of GDP growth in 2021 at 7.5%, which is almost too high to believe. Notwithstanding the very positive prospects of future economic growth, Congress and its ultimate wisdom will likely approve a $1.9 trillion stimulus sometime in the coming weeks.  

If you recall the last stimulus about one year ago, was roughly $3.2 trillion, the one right at Christmas was close to $1 trillion and you have another $1.9 trillion this year.  There is no question that putting this amount of money into the economy will be an economic boom of commerce and of individual consumer spending.  As this money starts to flow through the system in the spring, along with the reopening of the economy and the hospitality and travel industry, you should see an economic explosion unparallel in multiple decades.  

Ava and Dakota with 35-year clients
 Gerry and Allen Davidson

While stock prices are clearly high, you must compare them with the extortionary low interest rates.  Given that my projection is that bonds will have a negative return in 2021 and cash will earn virtually zero, stocks have become the only game in town.  If compared to long-term interest rates, today stocks are actually not overpriced, but rather fairly priced.

In retrospect, when you think about it, the Federal government has or will put roughly $7 trillion worth of stimulus in the economy over the year; it is a mind-blowing reality.  People ask me all the time how it is that they can create $7 trillion of new money.  When you own the printing presses you can virtually create any amount of money you want.  

Sheryl Matton, Gary McDade, Kathryn and 
Mark Keramidas celebrating Mark’s
 birthday in Deer Valley, Utah

There is absolutely no question that this is a long-term negative for the United States economy, but there is also no question that it is a short-term positive.  No one knows what the future holds, but at some point, that $7 trillion will have to be repaid by future generations.  You would expect that this flooding of the economy creating demand for commodities such as oil, food and housing will certainly increase the rate of inflation.  Moderate inflation is actually good for the economy in many regards.  It is not good if it is out of control.  The combination of higher inflation and the potential of higher rates to reduce inflation will almost surely be a negative for the economy in 2023 and 2024.  However, that is two years away and we need to enjoy the ride until the ugly inflation gauge stars to go higher.

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