Saturday, January 10, 2009

No One Warned Me That Old Yeller Was Going To Die!

From the Desk of Joseph R. Rollins

With the excitement surrounding the recently released movie version of “Marley & Me,” I couldn’t help but be reminded of going to see “Old Yeller” when I was a young child. I’ve been a Labrador retriever owner virtually my entire adult life, which I’m sure is from seeing Old Yeller’s loyalty to the Coates family in the beloved film. There are only a few films from my childhood that actually left an impression on me, but “Old Yeller” is certainly at the top of the list.

Growing up in rural Tennessee, our family had one small, black and white television set with rabbit ears and terrible reception. We watched the “The Wonderful World of Walt Disney” religiously, and one of my heroes at age 8 was Fess Parker who played the title character in the “Davy Crockett” Disney television series. You can imagine my excitement when I heard that Fess Parker would be starring in the Disney-produced “Old Yeller.”

In the 1950’s, going to the movie theater was an all-day experience. No one really worried about when a movie was scheduled to start or end; we simply went to the movie theater and stayed almost the entire day, watching not only the marquee movie (sometimes over and over again) but also the various film shorts and previews.

I hadn’t read Fred Gipson’s novel, “Old Yeller,” prior to going to see the movie, so I had no idea what the story was about. The main draw to the film for me was that Fess Parker was in it. Because it was produced by Walt Disney, I had my father’s stamp of approval to go see it. I can remember my father dropping me and my brother off at the movie theater one Saturday for a day of “movie madness,” and I also remember him giving each of us $1 to last us the entire day. The ticket to get in was a whopping $0.25, and the remaining $0.75 had to be carefully budgeted to buy our junk food and sodas throughout the afternoon.

“Old Yeller” centers on the Coates family, rural Texans who are very poor. One day when the father, played by Fess Parker, is away on a cattle drive, they receive an uninvited visitor, a scruffy “yeller” Lab mix. Yeller proves his loyalty to the family time and time again by saving them from frightening situations. One of the boys, Travis, grows especially close to Yeller, despite having been somewhat skeptical of him when he first showed up at the house.

Near the end of the film, Yeller develops rabies while protecting the family from a rabid wolf. Travis realizes he must protect his brother and mother from Yeller, who has started showing signs of madness from the rabies. In a heartbreaking scene, Travis tearfully shoots and kills Yeller. Did you cry, too, when you first saw “Old Yeller”?

In an effort to cheer-up Travis, who is devastated from the death of his beloved dog, he is given a puppy sired by Old Yeller. Travis initially refuses, but after his father explains the circle of life, he accepts the puppy, naming him “Young Yeller.”

Watching “Old Yeller” again recently, I noticed that the film would be considered amateurish by today’s standards. However, the story is just as moving now as it was back in 1957, and the climactic scene where Travis kills Old Yeller and makes his first step towards manhood is just as emotional and timeless. I may not have known Old Yeller was going to die when I first saw the film 52 years ago, but its rawness was still a jolt to my emotions when I watched it again the other day.

As an aside, I didn’t remember Chuck Connors being in “Old Yeller,” and I was surprised to discover that he had a role in the movie. After “Old Yeller,” Connors starred in “The Rifleman,” quickly becoming another one of my heroes. Connors had been both a professional basketball and a baseball player, and he is one of the few athletes who was able to play two professional sports successfully.

In the ABC series, “The Rifleman,” Connors played “Lucas McCain.” I vividly remember asking for a toy rifle (a politically incorrect toy for a child nowadays) just like Lucas McCain’s for Christmas one year. Similarly, several years after Disney had made Fess Parker a star in “Davy Crocket” and “Old Yeller,” he was cast in Fox television’s “Daniel Boone.” Oddly, the Davy Crocket and Daniel Boone characters both wore coonskin hats and carried big knives, making me forever mix-up the television shows…

Like “Old Yeller,” “Marley & Me” tugged at my dog-owner heartstrings. Before watching the film last night, I had actually read John Grogan’s memoir of the same name. In it, Grogan details the 13 years he and his family had with the boisterous and sometimes destructive yellow Lab named Marley and the invaluable lessons they learned from him.

After all my years of owning and breeding Labs (Daisy’s two litters totaled 20 pups!), I can relate to Marley’s various shenanigans and how his sometimes wild behavior and undying devotion impacted the family. I can also relate to the grief felt by the family after Marley’s death from old age. Truly, the only downside to owning a dog – even a nutty dog – is that they have such a short lifespan.

The movie version of “Marley & Me” is very good, although there are some differences between the film and the book. Grogan’s memoir details Marley’s neuroses quite explicitly, many of which would have been difficult to translate to film. However, the movie is still excellent, and even though I knew the ending, it didn’t make it any less sad to watch.

Just like no one warned me that Old Yeller was going to die in 1958, no one warned me that 2008 – 50 years later – would be such a devastating year for the financial markets. But the financial news was not nearly as bad as what the media was reporting, and I continue to be in the camp that believes much of the Wall Street carnage increased due to all the negative news being reported by the media. But whatever the reasons, 2008 was undeniably a tumultuous and wealth-endangering year.

As the 2008 year came to a close, the Dow Industrial Average finished down 31.2% for the year. The Standard & Poor’s Index of 500 Stocks was down 37%, and the NASDAQ was down 40%. OUCH! There’s no way to sugarcoat the terrible performance for the year; it was, in a word, devastating.

The 2008 investment year can essentially be summarized very simply. In 2008, there were only two classes of assets that made any money: cash and Treasury bonds. Everything else lost money, and in many cases, in a big way!

As I have previously explained, in every other year of investing, asset managers would typically move to a higher position in fixed-income assets to accomplish less volatility in a portfolio. But in 2008, that strategy did not help. Bonds, like stocks, suffered losses in the double-digits. In many cases well-respected long-term bond funds lost close to 30% for the year, and therefore, only cash and Treasury bonds seemed to offer any buffer to the sell-down that occurred (principally in the 4th quarter of 2008).

I truly believe that things are getting better now for the financial markets. I’m not implying that the economy is getting better, but as I’ve pointed out before, it’s not necessary to wait for the economy to recover for stock market performance to improve. In fact, there is even a general air of optimism being reported in the news! I don’t know whether this has to do with the incoming Obama administration, but quite frankly, given the avalanche of negative news that all of us have endured, any form of positive message would be a welcome improvement.

Something that clearly illustrates the investing public’s perception that the financial markets are improving is the current situation concerning U.S. Treasury bonds. As I pointed out in my December 13, 2008 post, “What We’ve Got Here Is a Failure to Communicate,” investors that ran to the safety of Treasury bonds did so at the risk of a significant amount of capital loss over a short period of time.

As 2008 came to a close, the 10-year Treasury bond was threatening to break below 2% annualized. Investors that were late in buying those bonds have now suffered through a dramatic decline in principal in the four trading days that have occurred so far in 2009. Four trading days since the beginning of the New Year, the 10-year Treasury is now yielding close to 2.5%. These investors have incurred a massive loss of over 4.5% in principal in a little less than one week. So much for the safety of investing in Treasury bonds!!

A featured article in Investor’s Business Daily this week pointed out that money market accounts that invest in U.S. Treasury bonds are now on the verge of offering negative returns. Since these money market accounts require some expense to manage the funds, there is not enough of an investment yield to pay those expenses. For the first time ever, these money market accounts are now facing the difficult task of either closing entirely or offering potentially negative yields to the public. It seems that the public is finally recognizing that other forms of risk capital, like equity and bonds, now offer an alternative to the zero interest rates Treasury bonds are offering.

Another obvious sign of an impending recovery is the incredible publicity regarding the efforts by Congress to revive the economy. The ante keeps being upped almost every day. It’s important to recognize that the original $700 billion in TARP money has not even been completely expended. The $350 billion doled out to the banks has barely been in the system, and the remaining $350 billion of the TARP money has yet to be allocated. I think we will live to regret trying to push the remaining money into the economy if we don’t wait to see whether the $350 million that has been expended has been effective.

I fully realize that I previously stated that it’s better to over-stimulate the economy rather than take the risk for it to not be stimulated enough. However, the question really becomes, “How much is enough?” With these two stimulus bills alone, we are talking about nearly $2 trillion in additional stimulus money. Additionally, the Federal Reserve has launched their program to buy mortgages, pushing down long-term home mortgage rates significantly below 5%. It would have been more desirable to wait and institute these programs gradually to determine the progress before funding the next program. I guess we will never know now since it is clear that a bipartisan Congress will approve a gigantic stimulus package sometime before February 15, 2009.

Democrats in Congress originally touted an economic stimulus plan of approximately $100 to $300 billion. Over the last week, this money has grown exponentially to $700 billion to $1 trillion. Unlike the TARP funds, this money will not be invested in assets that will be returned back to the Treasury. Rather, these assets will be invested in tax cuts and infrastructure for building bridges and roads. In other words, once this money is spent it will be gone forever, which is concerning. There’s no question that the economy has stabilized over the last month. But my fear is that this incredible flood of money from Congress’s economic stimulus package will destabilize the economy in the coming years. I fear that the economy will already be improved before this money is ever spent.

On another matter, the press – which is quickly becoming my #1 nemesis – is at it again. The Atlanta Journal-Constitution recently stated that the U.S. deficit would exceed $1.2 trillion in 2009. While the deficit unquestionably has the potential of getting that large, the AJC didn’t bother providing the specific details. In fact, after reviewing the specific bill, it’s fairly clear that some of these expenditures will only happen one time and will not be ongoing expenditures.

It’s currently estimated that the TARP will generate a loss of only $184 billion in the 2009 budget as compared to the $700 billion deficit being proclaimed by the press. During this budget year, the Federal government will invest $218 billion in Fannie Mae and Freddie Mac. This is a one-time investment that, in fact, should generate net positive returns to the Treasury in the future. In addition, the Federal government has invested $24 billion in the FDIC to stabilize that fund for potential bank failures and will not be recurring in future years.

Accordingly, in the Federal 2009 budget, $426 billion is expected to be expended on one-time only items. Unfortunately, the media doesn’t seem to take those facts into consideration when publicizing the potential deficit. For the press to say that this potential deficit is a higher percentage of GDP than the deficit for 1980 – which is something I have been reading lately – is completely false.

The economy doesn’t need to fully recover in order for stock prices to start climbing upward. What we really need is for the economy to stop going down, not turn up. If all of us suddenly realized that the economy had bottomed, the stock market would begin to turn-around practically overnight.

Not many people realize that the financial markets actually traded positively for the month of December in 2008. I wouldn’t be surprised if you hadn’t heard this positive news. With the avalanche of bad news being provided by the media, it is really hard to uncover even the smallest amount of positive news. However, the Dow Industrial was up 0.6% for December, the NASDAQ was up 1.1% and the S&P 500 was up 2.8%. These returns for December were quite excellent, and it was a good way to end an otherwise disastrous year.

One reason why I feel that movement is starting to happen is because of the improvement we have seen in stock prices since the market bottomed on November 20, 2008. Since that day through today, the Dow Industrial Average is up 15%, the S&P 500 is up 21%, and the NASDAQ is up 23% (not including dividends). The stock market is clearly improving, although it’s hard to see that with all the negative news we’re being provided.

I want to reiterate that the volatility we suffered in 2008 was completely unusual. I recognize that investors felt devastation every time they reviewed their dwindling portfolios, and I can tell you first-hand that money managers were feeling the destruction every minute, 24-7. It is incredibly difficult to explain all the wild moves and volatility when the economy doesn’t even support those drastic moves. In any event, I think it’s safe to say that we’ll never in our lifetimes see the type of volatility that occurred in the 4th quarter of 2008.

In the history of stock market investing, there have only been 37 days where the S&P moved over 5% in a single day. Of those 37 days, 18 of them occurred in 2008. For perspective, there were two days of 5%-plus moves in 1950, one in the 1960’s, one in the 1970’s, seven days in the 1980’s, four days in the 1990’s, and four days from the period from 2001 through 2007. In 2008, when the S&P moved 5% or more on 18 days, seven of those days were positive and 11 were negative.

In essence, we had more 5% moves in the S&P 500 during 2008 than we have had in the entire history of investing prior to 2008. In terms of volatility alone, the 4th quarter of 2008 was like suffering through 57 years worth of volatility. I don’t believe that we’ll ever have to suffer through this level of volatility again – it was clearly a year for the ages!

It’s also interesting to see the analyst projections for the stock market for 2009. The general consensus of market analysts is that the overall improvement will be 10% for 2009. However, I regularly see potential gains in the stock market in the 30% range. I suppose no one really knows what is getting ready to happen insofar as stock market performance. However, with the incredible flood of money that the United States and the rest of the world are forcing the economy to accept, business will improve this year! The stock market will foresee that improvement in business and will react accordingly.

In closing, I’ve said before that it’s never a bad time to make your IRA contributions. However, right now couldn’t be a better time – the opportunity to make money for your retirement is staggering. Since the New Year has begun, you can now make your contribution for 2009 while the market is still low.

Additionally, if you haven’t already made your contribution for 2008, you can make your contribution for that year at the same time. If you are less than 50-years old, the maximum amount you can contribute per year is $5,000 (a total of $10,000 if you’re contributing for both years). For those of you who are 50-years old or older, the maximum contribution amount per year is $6,000 (a total of $12,000 if you’re contributing for both years).

The benefits to contributing to your IRA are tremendous, especially when the markets are at such low levels and they are expected to significantly increase. Please feel free to call our office at 404-892-7967 if you have questions about contributing to your IRA.

As I’ve explained above, I expect significantly better stock market performance in 2009 than we have enjoyed over the last four to five years, and I think it’s already starting to happen.

Best regards,
Joe Rollins

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