Tuesday, August 11, 2009

Adventures on the Left Coast

From the Desk of Joe Rollins

With only one week left before my son, Joshua, returns to school (he’s 14 now, if you can believe it!), I decided to take him on a golfing excursion to some of the more famous golf courses in the Monterey Beach area last week. Today I want to provide you with some of my thoughts stemming from that trip and my personal impressions of the “bad economy” we are all supposedly suffering through. As information, there wasn’t a single empty seat on any of the flights I took during the entire trip. If the airline industry isn’t making money at this point, then it must be an unforced error on their part.

While my son was in golf camp during the week, I took a quick trip to Las Vegas, Nevada to meet with some clients. The week proved to be exhausting, and I was more than ready to come home, especially since I was tired of buying $15 glasses of wine. Whenever I go out of town, I must admit that I always look forward to going home. One of the true pleasures of traveling is to hear the flight attendant announce that, “We are making our final descent into Atlanta, and we will be landing at Hartsfield-Jackson International Airport soon.” Atlanta is my home, and in most cases, I prefer to be here than elsewhere.

As I sit here dictating this post with Bob Marley and the Wailers playing in the background, I cannot help but feel relaxed. I’m sure that’s no surprise to those of you who are familiar with this artist’s work. This feeling of relaxation is intensified by the fact that I also have the TV on – with no sound – and am watching Tiger Woods play in the World Golf Championship. There’s just no way to have a bad day with this combination.

I am posting a few pictures of me and Josh taken on our California trip. One shows Josh hitting off of Pebble Beach’s famous 18th hole, and another shows him on the legendary par 3 at the 7th hole. Both holes are some of the most celebrated in the golf world. I have also posted a picture of Josh and me on the 5th hole green, overlooking the lonely cypress which marks the end of the peninsula on the 6th green. Interestingly, this hole is in the front yard of Charles Schwab’s house; he didn’t invite me in. If you’ve never had a chance to visit Pebble Beach, I can tell you that it’s truly sensory overload.

You may have noticed from the pictures of Josh that he has grown a lot this past year – about 7 inches, to be exact. He stands close to 6’2” – quite a tall 14-year old, wouldn’t you say? There’s no doubt he gets his height from me.

After traveling so much over the past week, I’ve been pondering the exorbitant amounts of money our country wastes on airline security. A few years ago, a deranged potential terrorist tried to light a bomb in his shoe while on board a transatlantic flight from France. Fortunately, he was unsuccessful. Now, over one million people per day have to take off their shoes and walk barefoot through airport security – the world’s greatest breeding ground for athlete’s foot. I find the amount of money that is spent on security incredible, along with the fact that we hold up millions of travelers just because of the acts of one deranged potential terrorist.

On an early morning flight out of Monterey, California, there were four TSA agents and two passengers going through security. The elderly woman in front of me had to go through the screening machine at least 10 times before she was given clearance. It was sad to watch her take off each piece of her jewelry, including numerous bracelets that apparently set off the machines. Quite simply, it appears that airport security has taken on a life of its own and a much better job could be done with a lot less people and better technology. This may have little to do with the financial world, but it is still of interest to those of us who are subjected to this nonsense while traveling.

In addition to typical security hassles, I had my sixth money clip confiscated by security. I always forget that my money clip has a small knife attached to it, but security always catches it. I now order them in bulk only to turn around and contribute them to TSA. At least I get a tax deduction for them.

I played golf twice in Las Vegas, when the temperature was a blazing 110 degrees. It was quite a contrast from Monterey, where the high of the day was 55 degrees. There haven’t been many times in my life where I’ve visited two cities on the same day where the temperature in one city was double that of the other. I’ve often heard that people aren’t as affected by the heat in Las Vegas because of the low humidity. I can assure you that the high temperature in Las Vegas was significantly more comfortable than when I was cutting the roses in my yard this past Saturday. Atlanta’s humidity makes the temperature almost unbearable, and while it’s certainly hot in Las Vegas, it’s not overbearing.

So, what did my trip out West tell me about our current recession? One thing’s for sure – there were no signs of a recession in Las Vegas when I was there last week! The hotel where I stayed was booked and every restaurant had a waiting list to get in. Whether or not they’re taking in as much money on the gaming is hard to tell from walking through the casinos. Believe it or not, I didn’t wager a single dollar while in Las Vegas. I can tell you, however, that the high price of food and everything else in Las Vegas indicate that if there is a recession in the gaming industry, it will soon be over.

It occurred to me that my clients might like it when I’m out of town. Why? Because in the over one-week period that I was out West, the S&P 500 advanced almost 4%. I wouldn’t be surprised if my clients are taking up a collection to send me out of town more frequently. It is rare in the investment world that there could be such a large, positive move over a relatively short period of time.

The S&P 500 has now advanced exactly 50% since it established its low on March 9, 2009. As of Friday, the S&P was up a stunning 13.7% for 2009, which by any standard is a remarkable recovery from the disastrous year we had in 2008 and the first two months of 2009.

Clients often ask me how, if the market is up 13.7% for the year, the market could not have gained 50%. It is simply the axiom of a multiple from a smaller level. For example, if you have $100 invested in the stock market and it goes down to $50, then a move up of 50% brings you to a balance of $75. Clearly, we’re working out of the hole that was created in 2008, but you must admit that the move has been noteworthy. This makes me wonder how many investors are sitting and waiting for the right time to get back in the market – they’ve already missed a significant move up.

Even when I’m out of town I keep abreast of all the financial news by reading the publications on the Internet. Last week brought good financial news along with good returns for our investments. Friday’s announcement of reduced jobless claims was very encouraging. Even more encouraging was a tick-down in the unemployment rate from 9.5% to 9.4%. As I’ve often said in these posts, unemployment will be the last of the major economic indicators to recover, but at least it is moving in the right direction. I, like most economists, expect that the unemployment rate will still grow, so any move down indicates that at least employers are finally putting some people back to work. You cannot have a major recovery in the economy until more people are working and are able to pay their mortgages and buy consumer goods.

It was also very encouraging to see virtually all economists forecast that even the current quarter will very likely show a positive GDP growth. For those who continue to express the dour forecast of a “double-dip Depression,” they must be discouraged by the economists forecasting such positive growth. It appears that the 4th quarter of 2009 will return GDP growth to a more positive number, even though it will certainly be less than what we would consider to be a robust economy.

For those of you who are really interested in how the U.S. economy has recovered so quickly from such dire circumstances, then you must look to the Federal Reserve. The writing on the wall for a recovering economy is when in the 4th quarter of 2008 the Federal Reserve slashed interest rates and freed up the monetary base to put money into the economy. Their swift actions to prevent a prolonged recession have made the turnaround dramatic and sudden. Without the splendid work of Dr. Ben Bernanke and his dramatic moves to inject liquidity into the economy, such a move would not have been possible.

Dr. Bernanke’s term of office will come to an end in January of 2010. There is even some talk in the liberal press that he should be replaced by someone within the Obama Administration. To even hint at replacing a person of Dr. Bernanke’s intellect and abilities borders on outright lunacy. No Federal Reserve Chairman has ever had to face this type of downward turn in the economy and no one has ever so admirably and successfully performed as well as Dr. Bernanke. He should not only be reappointed, he should be congratulated for a job well done.

I am often asked about the wealth effect and how it affects the stock market. I have argued for years that the reduced values in real estate didn’t have as much of an effect as the reduced value of people’s investments. When your house goes down in value, it still offers you the benefit of somewhere for you to live. The fact that your house is down in value does not affect your net worth until you decide to sell your house. I argue that relatively few people are in that situation since they are not forced to sell their homes. The decrease in your home’s value may make you feel poorer, but it doesn’t have a dramatic effect on your daily expenditures.

However, when your investments decrease in value, you not only feel poorer, it also makes you feel like you can’t afford consumer items. As the stock market increases, you will see investors start to skim some of the profits off of their investments and use that to resume purchasing consumer items. This wealth effect of higher investments will give people the confidence once again to travel, buy cars and invest in real estate. This dramatic upward move in the stock market over the last five months will set the foundation for a stronger economy wherein people will once again resume consuming, which will broaden the financial recovery and bring forth a better economy for all Americans.

On Friday of last week, President Obama said his administration’s policies, “rescued our economy from catastrophe while building a new foundation for growth.” Sounds to me like President Obama is taking credit for the recovery. You may recall that in January, the $784 billion dollar stimulus act was passed. As of today, less than 15% of the money has even been spent and 2 million additional jobs have been lost. Yes, a lot of the money has been turned over to the states, but the actual funding of pet projects of Congress has not even begun. One should clearly argue that if the economy is already recovering, why do we need to spend money over the next two years in this gigantic waste of government money. Now would be an appropriate time to basically repeal a significant portion of the stimulus act and try to get the budget deficit under some kind of control.

I couldn’t believe my eyes when I picked up Monday’s edition of The New York Times and read economist Paul Krugman’s opinion that the government needs to approve a second stimulus bill immediately. His argument is that only bigger government can cure the economy. Krugman is the same economist who forecasted that every U.S. bank would be required to be nationalized in order to survive. He also forecasted that we would have a Depression even greater than in the 1930’s with its 25% unemployment rate. It’s even more interesting that Krugman concedes in his commentary that the economy is getting better and that the Federal Reserve and Dr. Bernanke are likely responsible for that positive action. Even his doom and gloom comrade, Dr. Roubini, has spoken of his confidence in Dr. Bernanke and the work he has done during this recession. Given how incredibly inaccurate these economists have been over the last two years, it is hard to take Krugman’s suggestion that a new stimulus package is necessary as being truly serious.

After dissecting 2nd quarter GDP data, economist Casey Mulligan noted on The New York Times blog (which is not exactly the mouthpiece of conservatives) that, “total stimulus at the state and federal levels amounted to only $12 per person.” I think anyone would have a hard time arguing that $12 per person did anything significant to stimulate the economy over the last five months.

The Wall Street Journal had an interesting editorial the other day. The expenditures of the Federal government for next year are close to $4 trillion. The government generates revenue of approximately $2 trillion, and therefore, to close the budget deficit, we would have to raise double of the revenues that the government currently receives. While tax revenues will increase in a better economy, there will never be an economy so good that it will make up such a shortfall. The Wall Street Journal pointed out that you can’t expect higher income taxpayers to make up the deficit. In fact, they pointed out that if you took 100% of the income for all taxpayers making more than $250,000, you couldn’t bridge this budget deficit. Therefore, anyone or any government that tells you otherwise is using governmental trickery.

On President Obama’s Saturday morning radio address, he said, “We must lay a new foundation for future growth and prosperity, and a key pillar of a new foundation is health insurance reform.” Such a phrase could certainly not have been uttered by an economist since it’s so clearly inaccurate. You cannot improve an economy by increasing taxes. In fact, it has been proven on numerous occasions – during the Kennedy, Reagan, and G.W. Bush Administrations – that to improve the economy, you must cut taxes, not raise them. Additionally, in order to fund this socialized medicine program, you would be adding another stumbling block for employers to hire employees. This act will do more to lose jobs in America than any legislation I’ve heard proposed as of yet.

While sitting on airplanes over the past two weeks, I had a lot of time to read a great deal regarding the proposed health care bill. Frankly, a great deal of it is totally unintelligible to the average person. However, after I was through reading virtually all the summaries I can find on the bill, I still cannot see anything in these proposals that will reduce costs and deliver better healthcare services. If President Obama is to be successful in selling this concept to Americans, he needs to emphasize what is in the bill that will make it better than the insurance most Americans are perfectly satisfied with today. All we’ve heard to this point is that very few additional people will be covered, the cost will be higher and the taxes will increase dramatically to provide less care to more people. It just doesn’t seem like this is a good deal, especially if it needs to be forced down the throats of Americans during the middle of a recession.

As amazing as it seems, no one in Congress or the Obama Administration seems to have a solution to the budget deficit. The solution is clearly not on the revenue side, but on the expenditure side. Congress has approved expenditures that will double U.S. government expenditures in only two years. If it’s true that the economy is now on the mend and positive GDP is forecasted for 2010, why on earth would we want to continue to deficit spend? The solution would be to immediately and dramatically reduce government expenditures by only spending what you are required to spend and by avoiding political funding of earmarks which add nothing to the economy and only hurts us in the long run.

We should also never forget that we live in a dangerous world. It didn’t receive very much publicity, but the U.S. military recently confirmed that two Soviet nuclear submarines were observed off the U.S. coast. The importance of a nuclear sub off of the coast of Georgia was downplayed, but it’s important that we not forget that they wouldn’t be there if they didn’t fear for their own wellbeing. In a time where we’ve elected to dramatically cut defensive budgets and spend the money on political earmarks, we should never forget that the potential for military action on our own continent is not impossible as proved by the events of September 11, 2001. There’s a fine line when the government spends money for military needs. Yes, you can sit down and talk with the enemies, but as President Teddy Roosevelt said, “Speak softly and carry a big stick.”

There was also good news last week that one of our unmanned drones shot and killed a Taliban leader and one of his wives in Pakistan. This is a clear example of how technology could control our enemies. Without the loss of one of our troop’s life, a drone flown out of Tampa, Florida was able to shoot and kill one of the most wanted men in the world.

In talking to people in Monterey and on the flights I took last week, it’s clear that the public still fears stock market investing. As has been noted here before, there continues to be an amount in cash on the sidelines equal to the full amount represented by the U.S. financial markets. However, it is quickly dropping. Every day, billions of dollars are being transferred into the bond market or the stock market. It is only a matter of time until a significant portion of this cash is invested.

The future for the financial markets continues to be outstanding. Stock markets increase before the economy. We now have hard evidence that the economy will be better next year than this year. This means that corporate profits will go up and stock prices should reflect that increased profitability. I continue to be amazed that we’ve not seen more inflows of money into investments. Now is the time to participate in that rally. With cash yielding less than one-half to 1% per year, and a market that’s up 50% in the last five months alone, it’s not too late for you to participate in future profitability.

As always, these are my thoughts, opinions and forecasts. It’s perfectly possible that I am wrong.

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