Thursday, December 30, 2010

Happy New Year!

Dear Valued Clients and Readers,

Our office will be closing early this afternoon and will be closed all day tomorrow in observance of the New Year's holiday.  Our normal office hours will resume on Monday, January 3rd.

If you have a matter that requires immediate attention, please contact Joe Rollins at or 404.372.2861.

Cheers to 2010 being a great investment year and to a prosperous 2011!


Joe Rollins, Robby Schultz and Eddie Wilcox

Thursday, December 23, 2010

Happy Holidays!

Dear Readers,

In celebration of the Christmas holiday, our office will be closed on Friday, December 24th and Monday, December 27th. Our regular office hours will resume on Tuesday, December 28th.

If you have a matter that requires immediate attention over the weekend, please contact Joe Rollins at or 404.372.2861.

We wish you and your families a holiday weekend filled with peace, joy and laughter!  Here's a clip from "Elf" -- a great new Christmas classic -- to get you in the holiday spirit:

Warm Regards,
Joe Rollins, Robby Schultz and Eddie Wilcox

Tuesday, December 14, 2010

Q&A Series – Timing IRA Contributions

This week’s question comes from John, a client who is wondering when is the best time to contribute to his IRA – at the beginning of the year or at the end?

Q: When is the best time of year to make an IRA contribution?

The clear answer is “the sooner the better.” Many of you have received a note or an email in the past from Joe suggesting to make an IRA contribution early in the year. Undoubtedly, many wonder "what’s the rush?" You actually have until the tax filing deadline of the following year to actually make an IRA contribution, but it’s our position that it’s always in your best financial interest to make the contribution on January 1st or the first business day of each year (the first business day of 2011 is January 3rd).

Making the following assumption, here’s why contributing to your IRA on the first business day of the year is best:

  • Our expected return is 8% annually (keep in mind that some years will be better while others will not be as good, but we’ll expect this average over the next 35 years).
  • Each participant makes an annual lump sum contribution of $5,000 to his or her respective IRA.
  • Each participant will retire at 65.
  • We’ll assume this is the participants' only savings and not consider prior or additional investments.
If we make the assumptions noted above, you can see the results in the following table:

Age Year End Value (8% return - end of year contribution) Year End Value (8% return - beginning of year contribution) Difference
30 $940,506.84 $1,010,352.68 $69,845.84
40 $399,772.08 $431,753.84 $31,981.77
50 $151,621.42 $163,751.13 $12,129.71

Clearly, the savers who chose to invest their IRA contributions at the beginning of the year have come out much better. The 30-year old who contributes and invests for 35 years comes out nearly $70,000 ahead by making his or her contributions to gain the full benefit of each year’s returns. The 40-year old is better off by nearly $32,000, and finally, the 50-year old who has only invested for 15 years has over $12,000 more than if he or she had contributed at the end of the year instead.

What’s the moral of the story here? Be proactive; don’t procrastinate in making your annual IRA contributions if you can. There are very real and negative consequences to delaying your IRA contributions until the end of the year or waiting until the filing deadline in April.

John, I hope my answers above have given you a better understanding of our thoughts about when to contribute to your IRA each year.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Eddie Wilcox

P.S. Some of you are probably good candidates to convert your regular IRAs into Roth IRAs before the end of the year, although we are almost out of time. If you’ve got severely diminished income in 2010 compared to future and past years, you’re probably a good candidate. Conversely, if you’re in the top bracket now and think you’ll be in the top bracket throughout retirement, you’re probably also a good candidate. Call us ASAP to discuss the details if you think your situation might apply.

Tuesday, December 7, 2010

Q&A Series - What the Tentative Tax Deal Means for Investors

This week's question comes from Jim, an investor and reader who is wondering about the tentative deal to extend the Bush-era tax cuts.

Q: I saw on this morning’s news that there’s a deal on the table to extend the Bush-era tax cuts. How might this impact stock market investing?

Great question, Jim. First, and as you noted, this is not a done deal. Right now, there’s a potential tax cut extension deal in the works that would extend the Bush-era tax cuts for two years at all income levels. Also included in that package is a 13-month extension of unemployment benefits for the long-term unemployed and a 2% decrease in payroll taxes for all workers for one year.

I feel relatively certain that the extension will be enacted pretty much as it is currently written with some minor changes, and the basics of this deal are extraordinarily positive for stock market investing. The Bush-era tax incentives offer a 15% maximum tax rate for dividends and capital gains, and extending these incentives could not be any more bullish for the stock market. With this tax cut extension and with interest rates as low as they are right now, anyone who keeps money in a taxable money market account or CD instead of investing in the stock market is making an ill-advised choice.

For example, if an investor purchases a common stock today with a 5% dividend, even the after-tax (federal and state) return on that investment is 4%. Rarely in the history of investing have investors been able to earn 4% after taxes on any type of investment. Investors who invest in taxable money market accounts and in commercial bank CDs pay a maximum federal and state tax rate of approximately 40%. Therefore, for the pleasure of getting virtually no return on an inferior investment, the investor is punished by a much higher tax rate.

The basic intention of the tax cut extension is to drive money out of money market accounts and CDs and into stock market investing. This will fund economic growth and create stability in corporate America. Furthermore, over the last two weeks, there has been a lot of positive conversation about deficit reduction. The bipartisan deficit-reduction panel made what I consider to be fairly radical proposals to reduce the federal deficit over the next decade.

At the end of the day, the National Commission on Fiscal Responsibility and Reform did not receive the super majority of the committee voting on the proposals, but they did receive a simple majority. Some of the participants in this committee have already finished their political careers and made hard recommendations that would be very useful for the U.S. government to adopt. However, as is true to form at the federal level, the proposed tax deal announced last night by President Obama adds approximately $900 billion to the federal deficit over the next two years.

Nearly half of the money from this compromise package will be to finance social programs that will put money into the economy and hopefully help employment. One of the programs is the one-year 2% reduction in payroll taxes for all workers. Even though the employer will not be involved, this 2% will be immediately felt by all who are employed. As pointed out by the New York Times, a family earning $50,000 per year would receive a savings of approximately $1,000 while those who pay the maximum tax on income of $106,800 or more in 2011 would receive a savings of $2,136. This type of proposal has been recommended for years, but hopefully now be adopted. It will affect all working Americans and immediately put money into the economy.

As noted above, the package would include an additional 13-months of unemployment benefits for the long-term unemployed. Even though numerous studies indicate that long-term unemployment benefits probably does more harm than good for the economy, it is a humanitarian gesture. Studies indicate that when unemployment extends beyond a normal and reasonable time period, the unemployed tend to not take jobs that are available. Even though unemployment benefits are minimal, they tend to provide enough money where someone would not take a job they feel is inferior. With this extension, up to three years of unemployment benefits are paid in the United States. Unquestionably, unemployment benefits paid to those who are out of work are a necessary humanitarian effort and these benefits are quickly spent in the economy, creating additional stimulus.

The 2% decrease in payroll taxes along and the extension of unemployment benefits are very expensive programs, but they will hopefully add additional stimulus to the sluggish U.S. economy.

The most controversial provision announced by President Obama last night was the reintroduction of the estate tax in 2011. This will affect estates in excess of $5 million with an incremental rate of 35%. This is one provision that I anticipate will change before the deal is agreed upon, and everything I have read indicates that the preferred level will be $3.5 million at a 45% rate. The important point is that in 2010, there was no estate tax, but in 2011, there clearly will be.

Included in the bill are many other extensions of tax provisions that are related to businesses. However, the bill does fix the alternative minimum tax for 2011 so that the vast majority of Americans will not be impacted by this brutal add-on tax. There are many provisions under the proposed bill that would increase depreciation and extend additional pro-business and pro-investment credits.

Even though none of us want for this package to add to the federal deficit, none of us should be disappointed to see the lower tax rates extended for two more years. My post from last week indicated that we are now in the best investing environment in a decade. With the extension of the 15% capital gains and dividends tax rates for two more years, my theory raised in that post may be truer than ever.

Jim, I hope my explanation above has given you some insight as to how this tentative tax deal might affect the stock market and provide information on some of the other elements of the package on the table.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joseph R. Rollins

Friday, December 3, 2010

Best Investing Environment in a Decade?

From the Desk of Joe Rollins

In Wednesday's edition of the Wall Street Journal, it was reported that if you met the minimum for a 6-month "jumbo" CD investment, you could profit handsomely at the rate of 0.32%. I found this to be both amusing and confusing. Folks, this is 0.32% return, not 32%. This means that if you had a $100,000 CD on a 6-month term, then you would earn $160 at the end of the CD term. This percentage further supports my theory that we are now enjoying what is perhaps the most favorable investment environment in over a decade.

I have often written that stock values are affected by interest rates and earnings. During the 3rd quarter of 2010, American corporations enjoyed the highest profits ever recorded in the history of U.S. finance, as reported by the New York Times on November 23, 2010 in the article, Corporate Profits were Highest on Record Last Quarter. Those high corporate profits coupled with the lowest rates ever in the U.S. could not provide a better recipe for high earnings and low interest rates.

I can’t imagine why any investor would consciously roll over a CD earning a miniscule interest rate of less than one-half of 1% annualized, especially when so many stocks can be purchased with dividends yielding well in excess of 5%. I suspect that many investors will come to this realization as their CDs begin rolling over in the next few months.

The recent stock market run has been somewhat remarkable: At the end of trading yesterday, the S&P was up 11.62% for 2010, and the average of all of Rollins Financial’s accounts under management are up 12.34%. It has been an extraordinary year, so I am completely baffled as to why the financial press seems intent on focusing on the negative news.

On March 9, 2009, the value of the S&P 500 was at 681. As of Thursday, December 2, 2010, that same index is at 1,219, which represents a total gain of 80% in the last 19 months. This is an extraordinary percentage by any definition. However, many financial analysts who have been out of the market this entire time are still expressing caution regarding the U.S. economy.

Have you noticed that there has been no talk of a double-dip recession lately? In fact, the economy has now stabilized and is actually starting to grow again. While unemployment is still high and will decrease gradually, the hard evidence indicates that the U.S. economy is picking up. Manufacturing, exports and retail sales have been gaining traction recently – all signs of an improving economy.

It is now estimated that the U.S. GDP for 2011 will be approximately 3%. If you reflect on this percentage, you will see that it is more than incredible. During 2010, we enjoyed the highest corporate profits ever in the history of the United States during an economic environment of high unemployment and subdued 2% GDP growth. Can you imagine how high corporate profits will be when employment and GDP improve as they surely will in a year or two?

Even though the U.S. economy is described as sluggish and slow-growing, it is still recording record profits. Given that scenario, the potential growth that is available to us through investing in China with its 9+% GDP growth, India with its 8+% GDP growth, and the rest of the emerging markets that are growing at a rate that – in most cases – is twice the anemic growth in the U.S. In short, corporate profits – which eventually impact stock prices – are exploding around the world.

There is hardly a day that goes by that I am not asked by investors about investing in gold. It’s hard to evaluate gold since it has virtually no investment quality. The things that we worry about with stocks are hard to analyze when it comes to gold. Gold pays no dividends, it is not scarce by any stretch of the imagination, and demand is not particularly robust. At one time, gold was considered the investment to protect against inflation (but there is no inflation – why else would we have QE2?), and during times of world strife. Neither of those factors seems to be present at the current time.

I am also asked whether one should invest in gold or the numerous gold coins that are continuously advertised on the financial press. If you really want to test the investment quality of gold coins, call the many companies that advertise on TV and ask them if you buy $1,000 worth of their coins today, what they would be willing to pay you to buy them back tomorrow. I’m sure you will discover that it’s a much better deal selling gold coins than purchasing them.

Even though I cannot evaluate gold from an investment standpoint, there is no question it has gone up throughout the year. However, in the words of George Soros, gold is now “the ultimate bubble.” So if you invest in gold, you do so at your own peril. Truly, the more important question to ask yourself is why would you buy gold at an all-time high when stocks are so cheap?

It’s interesting that almost everything around us is going up in price. Even though the Fed continues to express concern regarding deflation, all around us we are seeing inflation. From the date that the Fed announced that QE2 would be expanded by a total of $600 billion, everything has gone up appreciably. Even though the goal of QE2 was to reduce interest rates, the 10-year Treasury has gone from 2.57% on the date of the announcement (November 3, 2010) to 2.95% today. (See my QE2 post by clicking here) You could say that the 15% higher interest rate we have today was not the positive move that the Fed wanted when they announced QE2.

I talk to investors every day about the misconceived and misplaced perception that the markets have been bad this year. The facts completely belie those investors’ assessments. What baffles me even more is that so many investors are sitting around with money in money market accounts earning zero and are not overcoming their fear of investing in these great markets.

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

Best regards,
Joe Rollins

Wednesday, November 24, 2010

Happy Thanksgiving!

Dear Readers,

Although Thanksgiving gives us the opportunity to be gluttonous, its true meaning is simple: to give thanks for what life has given us and the fortunes bestowed upon us.  It is a uniquely American holiday, where in 1621, the Plymouth colonists shared an autumn harvest feast with the Wampanoag Indians that is acknowledged today as the first Thanksgiving celebration.

For more than 200 years, days of thanksgiving were celebrated by individual colonies and states, but in 1863 -- in the heart of the Civil War -- President Abraham Lincoln proclaimed a national Thanksgiving Day to be held each November. 

All of us at Rollins Financial hope your Thanksgiving is filled with happy moments, simple pleasures, and grateful hearts.  We are very thankful for you.

Warm regards,
The Staff of Rollins Financial

Please note that our office will be closed on Thursday, November 25th and Friday, November 26th. Our regular office hours will resume on Monday, November 29th.

If you have a matter that requires immediate attention, please contact Joe Rollins at or 404.372.2861.

Wednesday, November 17, 2010

Q&A Series - When Should I Start Drawing Social Security Retirement Benefits? - Follow Up

This week's question is in response to several questions from several readers regarding our post on November 2nd titled - Q&A Series - When Should I Start Drawing Social Security Retirement Benefits?

Q: I read your post on November 2 with great interest, and as I approach age 62, should I start taking my Social Security (SSA) benefits immediately?

This is a very good question, but unlike the previous answer Joe Rollins gave when it came to your Full Retirement Age (FRA), it is much more complicated than a simple yes or no. The first piece of information is that the FRA benefit is reduced by 25 - 30% depending on when you were born. If your FRA is age 66 (1943-1954), then it is reduced by 25%. If your FRA is age 67 (1960 and later), then it is reduced by 30%.

As in Joe’s previous post, your personal situation is what will determine the best and most effective route to take. There are still the questions of:
  • What are your current cash flow needs?
  • How much do you anticipate needing in retirement?
  • Are you in good health?
  • Do you have other forms of retirement income?
  • How much would you receive in the form of a Social Security benefit?
  • Do you plan to continue working in retirement?
Part 1

One of the very important differences between taking SSA benefits at age 62 versus FRA is the earned income limitation that the SSA implements. In 2010, if you are receiving benefits prior to your FRA, the SSA has put an earned income limit of $14,160. For every $2 you earn in excess of $14,160, you lose one dollar in benefits.

For example, if you work and make $35,000 in 2010, your benefit would be reduced by $10,420.

$35,000 - $14,160 = $20,840

$20,840 / 2 = $10,420

There are two large issues that you now face. First, you must now repay SSA $10,420 or they will simply withhold it from future monthly payments until you have repaid the funds. Second and most importantly, you are penalized as if you received the entire benefit thus your benefit for future years is reduced even though you didn’t receive all of the funds.

If we look at the example Joe used before for “Jane” which was: “My most recent Social Security statement indicates that I’ll be drawing $2,356 per month at full retirement age...” The numbers are substantially different at age 62 versus FRA (we will use 66). The benefit at age 62 for Jane is only $1,767 per month or $21,204 annually.

If Jane worked and made $35,000 as we discussed above, Jane’s actual benefit from SSA would be reduced from $21,204 to $10,784. Plus, Jane is now pegged with starting her distributions at age 62 and receiving a reduced amount for the rest of her life.

Part 2

The answer to this question is much like the answer that Joe used in his previous post. If Jane waits until her FRA, she would receive a benefit that was $569 higher than at age 62. The risk is still if she dies before taking her benefits, then she received nothing and her beneficiaries would receive nothing.

In a similar scenario provided by the Social Security Administration, they indicate that if a person retires at age 62 (FRA is age 66 in this scenario), the accrued benefits after four years would be $84,816 ($1,767 x 48 months). If you divide $84,816 by the additional $569 per month you would receive by waiting to collect benefits until age 66 (FRA), then it would take 144 months (12 years or until age 78) to reach the breakeven point (not considering the time value of money) between collecting benefits beginning at 62 or waiting until a person reaches FRA.

Therefore, at age 78, a person’s accrued additional payments for waiting until FRA to start drawing benefits is exactly equal to the first four years of total payments received by a person who begins collecting at age 62. By this illustration, it appears that if you live beyond age 78, you would be better off starting retirement benefits at FRA (age 66).

There is an alternative that could warrant some consideration. If you save 100% of your Social Security retirement benefits from age 62 through age 66 (FRA) while you have other forms of retirement income (and less that $14,160 in earned income) and earn 5% per annum, you would have an accumulated balance at age 66 of $94,062 ($1,767 x 48 months = $84,816 + $9,246 interest). Then, at age 66, if you start withdrawing the $569 difference from this account on a monthly basis but still earn 5% on the remaining balance, it would take 23 years to get to the breakeven level using the FRA monthly benefit amount. With this method, if you were to die early, then you would still have a nest egg to pass on to your beneficiaries.

As you can see, by using this method you could live to age 89 (11 years longer) before it would have been better to wait until FRA to start drawing Social Security retirement rather than starting benefits at age 62. While we hope all of our clients live at least that long, it’s highly likely that many will not.

While this is a possible scenario, each and every personal situation should be fully examined before starting down this road. Full Retirement Age calculations are somewhat easier in that you do not need to worry about the earned income of a person drawing benefits. They can make $5,000 or $5 million and the benefit does not change, but in early retirement withdrawals these calculations can become quite complex and usually need some additional savings as a safeguard. Whatever road you look down, it is always best to discuss the various options to insure that you are correct.

I hope my explanation above has helped to show why it is necessary to research every scenario and situation before individuals start drawing Social Security retirement benefits. It’s always best to thoroughly evaluate your particular situation to determine the best way to maximize your own benefits, and in that regard, Rollins Financial is here to help. Navigating Social Security benefit options can be tricky, but we can help you make the best decisions to positively impact your retirement years.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Robby Schultz

Monday, November 8, 2010

Q&A Series - Quantitative Easing

This week's question comes from Al, a long-term client who would like a better understanding of quantitative easing.

Q: Why is more ‘quantitative easing’ a good thing? As the dollar gets further weakened, and as the Fed buys back more assets and the Treasury prints more money, how can that be good?

Considering the Fed’s announcement on Wednesday that they will go forward with their second round of quantitative easing (QE2), this question is on the minds of many investors. The Feds announcement detailed that the Federal Open Market Committee (FOMC) members voted to buy $600 billion of government securities to hold in their own inventory through the middle of 2011.

Taking this measure is what economic nerds refer to as ‘quantitative easing’ – and what non-economists call ‘turning on the printing press.’ Basically, it’s a monetary policy wherein the Fed increases the money supply by increasing the excess assets of the banking system. This is usually accomplished through purchasing the federal government’s own bonds to steady or increase their prices, with the hoped result of lower long-term interest rates.

Understanding just how QE helps the economy is complicated, but I will give you some examples of how it works and the potential upsides and downsides. In Fed Chairman Ben Bernanke’s opinion piece in Thursday’s edition of the Washington Post, “What the Fed did and why: supporting the recovery and sustaining price stability,” Bernanke explains his concern about the economy’s lackluster growth and the high national unemployment rate. He additionally indicates that the U.S. inflation rate is below 2%, a percentage that is inconsistent with a healthy economic growth rate. Therefore, the FOMC’s goal in QE2 is to increase employment by increasing the inflation rate. Sounds simple, right? Not so.

In explaining QE, it’s important to understand some other background economic information. During the 1930s, economist John Maynard Keynes wrote The General Theory of Employment, Interest and Money, the basis of ‘Keynesian Economics.’ In its simplest form, Keynesian Economics dictates that when the economy is slow and unemployment is high, the public sector (the federal government) must utilize deficit spending to create additional economic stimulus and to increase employment. This is the method that was employed under the TARP to stabilize the economy from the financial crisis that started in the fall of 2008. Unfortunately, it hasn’t been spectacularly successful and the public hasn’t been very happy with the results thus far.

It must be pointed out, however, that the stimulus bill wasn’t really Keynesian Economics. Under that theory, the stimulus bill would’ve been created to put employees back to work and to create jobs specifically in the private sector. While some of the stimulus plan was designed to do just that, a significant portion of it was not.

A key component of the stimulus bill was to give money to state and local governments to protect the jobs of state employees and local teachers and firefighters. While that undoubtedly saved jobs by giving the states and municipalities enough money to employ these people, it did not create jobs. Private industry and corporations create jobs, not the public sector. By virtue of spending the stimulus bill to allow the states and local governments to employ people for one additional year might have been helpful in the short-term, but it didn’t help when the employees were ultimately laid off when no funding was available the following year.

Therefore, a large portion of the stimulus bill was misdirected in a fashion that did nothing to help employment. Unfortunately, the Keynesian Economic theory was criticized for being unsuccessful as it relates to the TARP in 2009 and 2010 when, in fact, it was misapplied. The Fed’s plans for QE2 are to create employment by increasing asset prices and reducing the value of the dollar.

Ironically, it is somewhat paradoxical that the federal government is currently issuing approximately $125 billion per month to fund the federal deficit for fiscal 2011. As you may recall, the deficit for 2011 is projected to be $1.5 trillion. In order to fund that deficit, the Department of Treasury must issue approximately $125 billion in new debt each month. Wow - this is really scary!!

Federal Reserve Chairman Ben Bernanke is a scholar in economic downturns, and he has written extensively on the Great Depression and Japan’s deflation woes. Even though inflation in the U.S. today is at approximately 1.8%, there doesn’t appear to be any imminent danger of the country slipping into deflation. However, it’s clear that Dr. Bernanke does not intend for that to happen.

Reviewing Japan’s economic record over the last 25 years will give you a better understanding of just how dangerous deflation can be. Even though Japan’s interest rates have been at virtually zero during that entire time period, the country has stumbled to create growth. In fact, during many of those years Japan had a negative GDP growth, causing the country and its people to suffer.

Dr. Bernanke believes that for the GDP to grow, inflation must be greater than 2%. The QE2 policy is designed to create that growth. It should be emphasized that in taking this measure, the Fed isn’t doing anything unordinary. At various times during all economies, the Fed enters the open market and purchases bonds from banks to create liquidity. However, in the case of QE2 in particular, the banks and corporate America are currently flooded with excess cash. There’s no reason to create additional cash in these areas since ample supplies already exist. It’s now believed that corporate America and the banking institutions hold approximately $4 trillion in available cash. The question is how to get them to implement it for additional growth.

About a month ago, the Fed announced that they would be purchasing additional debt in the open market to replace the maturing debt in their current portfolio. Most experts estimate that this Fed-owned debt that rolls over every month is approximately $30 billion. Therefore, every month for each debt that comes due and the interest they receive, they use that cash to replace other debt of approximately $30 billion. We are talking real money after a few billion.

When you hear that the Fed is going to purchase $75 billion of debt each month, you may wonder exactly where this money comes from. This is the classic situation wherein the federal government breaks out its printing press to produce brand new money so they can purchase new obligations. With the $75 billion in brand new money printed by the Fed, along with the $30 billion from notes that are rolling over, the Fed has approximately $100 billion to purchase government securities. I suppose that new jobs are created to run those printing presses.

As mentioned above, the Treasury is ironically issuing about $125 billion in new debt each month, with the Fed being the buyer of approximately $100 billion of this money. It is now estimated that approximately $7 out of every $10 in new debt over the next year issued by the U.S. government will be purchased by the U.S. government. Yes, that seems odd.

There are many purposes for the purchasing of this debt: First, it squeezes out all new borrowers since the government will be the ultimate purchaser of the debt. By creating a mass buying mechanism for the debt, interest rates will be forced down even lower than any rate we’ve ever seen in U.S. history. For example, the one-month Treasury as I write this post is .122%; the one-year rate is .206%; the five-year rate is 1.096%, and; the ten-year rate is 2.539%. Therefore, if you invest $10,000 for one year, you make $20.60. Now they want interest rates lower?

These incredibly low interest rates have created quite unusual financial circumstances. On Friday, the Coca-Cola Company issued three-year bonds with an annual coupon of .75%. Ironically, these new Coca-Cola bonds – which were oversubscribed by the public – have a coupon rate of .75% while the common stock has a dividend rate of 2.9%. This means that you can borrow the debt of the Coca-Cola Company at .75% annualized, or invest in its stock, and make 2.9%. This is the intended result of QE2, and it shouldn’t take long for investors to figure out that while the purchase of securities contains more risk, they create more wealth. As we all know, the wealth effect trickles down to higher consumer spending.

The Fed has said that, even though they will buy Treasury obligations of all terms, they will focus on the mid-range (5-6 year) Treasury bonds. Therefore, this concentrated purchase will force interest rates down below five years and higher for longer term bonds. The purpose of this is to make interest rates so low that it will force investors out of interest rate certificates into higher risk investments. While this hurts CD investors, the intent is to move them away from these forms of low-yielding investments by making stocks, bonds, commodities and other types of higher risk investments more attractive.

Naturally, many are wondering why the government is taking this route. The most important reason is the wealth effect. If the value of stocks, bonds and other commodities are increased, then consumers and corporations will feel enriched and will more likely spend the money. It has been often proven that as the wealthy effect increases, consumers will spend more and utilize their newfound wealth to purchase consumer goods, personal property and real estate. All of this is good for the economy.

It’s absolutely true that everything I’ve discussed up to this point is inflationary because it creates the effect that all components of finished goods become more expensive, this is exactly what the government is trying to accomplish. The government would like to see higher inflation to avoid the risk of the country falling into a deflationary cycle.

In the Great Depression of the 1930s, the single largest financial problem was deflation. Assets were worth less each year than the year before, making it undesirable for anyone to purchase hard assets since they would lose money in time. If the government is able to create of inflation by forcing investors from low interest rate certificates, it benefits the holders of these risk assets, and ultimately, the economy as this wealth effect is passed on to other consumers.

The other interesting aspect of these low interest rates is that a five-year Treasury today is yielding 1.09% per annum. If you purchased that security today, with the Fed’s intent to increase inflation above 2% per year, then the bond you purchased would have a negative rate of return. The Fed presumes that it won’t take investors long to figure out that their bond securities are generating negative rates of return, and therefore, they will migrate their investments to other types of risk instruments such as stocks, corporate bonds and real estate.

There’s another important aspect of inflation that is rarely taken into the public’s consideration. Corporate America realizes even more of a wealth effect due to inflation than the average investor. Inflation makes corporate America’s inventory immediately more valuable. It increases the value of their real estate holdings, and therefore, creates real net worth to these corporations. Since the private sector is the generator of new jobs in America, the wealth effect of this increase in assets will presumably make the corporations feel more secure about their futures, and therefore, unleash their purse strings for additional employment.

The other major effect of QE is that is almost assuredly will hurt the value of the dollar. On CNBC’s “The Kudlow Report” last night, Larry Kudlow railed for almost an hour regarding the negative effect that the Fed’s action will have on the U.S. dollar. I think he’s probably missing the point: The Fed would very much like to reduce the value of the dollar in respect to other foreign currencies.

The reason for the Fed’s action to reduce the dollar is that as the dollar becomes cheaper in respect to foreign currencies, all imports in the U.S. are more expensive. This means that U.S. manufacturers become more competitive with international manufacturers who import to the U.S. Hopefully, this will stimulate the expansion of U.S. manufacturing. Additionally, these same manufacturers will be more competitive in international commerce, creating higher manufacturing rates in the U.S., and therefore, an increase in employment.

There’s no question that a lower dollar is inflationary, and in most circumstances, would be considered non-desirable. However, this particular action is designed to create higher inflation, not eliminate it.

The principle positive benefits of QE would be to reduce interest rates, forcing investors away from low return investments into higher risk investments, creating the inflation effect of hard assets, which improve the wealth effect to all Americans. Additionally, it forces down the value of the dollar, which improves the competitiveness of U.S. manufactures against foreign manufacturers and makes exported goods more competitive in international commerce. All of these are the hoped positive outcomes of QE2.

There are many potential negatives to QE2, and the Wall Street Journal has even referred to it as Bernanke’s ‘Hail Mary’ pass. Of course, the primary risk is that inflation will get out of control and we will have a Jimmy Carter-type era, wherein inflation hits 12% annualized. While the Fed fully intends to withdraw QE2 before such inflation occurs, many are questioning whether or not they can see inflation becoming any better than what they saw during the 2007 crisis. By risking such a large sum of money, it is perfectly possible that the Fed would not be able to withdraw the liquidity before inflation becomes ominous.

While pushing down the value of the dollar is a short-term positive for manufacturing in the U.S., there is certainly no guarantee that other countries will not respond in kind. Already, Brazil and Indonesia have announced programs to reduce their currencies to keep massive capital from exiting the United States into their countries, seeking higher interest rates. In fact, the Japanese yen is selling at its lowest point ever against the U.S. dollar, and the Japanese certainly won’t tolerate that for long.

A potential risk of QE2 is that open trade wars will break out between the U.S. and other countries that are devaluing their currencies. Therefore, our devalued currency will not be any more competitive than before. Since this is not a coordinated global effort, it is possible that other currencies will adjust in lockstep, making the plan ineffective.

Several countries in the world have already locked their currency rates to the United States anyway. China and Korea, for example, have never allowed their currencies to float in the international marketplace. They simply adjust their currencies to a standard of the U.S. dollar and do not allow it to adjust one way or the other very far.

While inflation is good when moderate and under control, it is dangerous over time. The wealth effect is effective when it trickles down to consumer spending; but it will not be long before the effect of inflation eats into every family’s budget. Inflation will create higher prices for almost everything, and soon, employees will be demanding higher wages and benefits to offset the additional costs they are incurring. This spiraling up of prices can have a devastating effect to an economy if not controlled.

One of the biggest concerns, of course, is that QE2 takes the pressure off the federal government to even attempt to control deficit spending. By the government purchasing all of the debt that they have issued, they will always have ready and willing buyers. Dr. Bernanke expressed that concern in his Washington Post Op-Ed, and everyone should read his closing paragraph in that editorial:

“The Federal Reserve cannot solve all of the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.”

QE2 has never been tried before, and as such, there’s no way for anyone to know for certain whether or not it will be successful. However, I have been greatly impressed with Dr. Bernanke and his ability to adjust the economic measures he takes accordingly. We can only hope that if Dr. Bernanke sees in the coming months that QE2 is no longer needed, he will completely abandon the entire project.

From an investing standpoint, we could not ask for a more favorable investing environment. With the federal government flooding the system with cash and attempting to increase asset values, that makes all of our current investments more valuable. If they are successful in devaluing the dollar, it makes our international investments even more valuable.

I continue to be confused by the number of people who continue to invest in low-interest bearing CDs when the stock market is up close to 80% since March of 2009. If investors are unhappy with the low interest rates provided by CDs now, they’d better watch out, because they are only going to get lower in the coming months.

Al, I hope my explanation above has given you some understanding of quantitative easing, why the Fed is using this method, and the pros and cons of this technique.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Wednesday, November 3, 2010

An Outstanding October!

From the Desk of Joe Rollins

All the dire forecasts and predictions of gloom and doom going into September and October of this year wound up being off target, as further evidenced by the excellent market performance during October. During October, the return on the S&P 500 was 3.8%, reflecting that September and October had the best performance ever for those two months in the history of the U.S. financial markets. In fact, the S&P is up 8% for the last three months, and up 16.5% for the one-year ended October 31, 2010. How do these returns compare to the returns of your money market account?

Rollins Financial’s total portfolio under management was up 9.8% compared to 7.8% for the S&P through October 31, 2010. Coupled with the S&P gain during 2009 of 26.46%, Rollins Financial’s total portfolio had a very impressive 12 months in 2009 and 10 months for 2010.

My “Why is Everyone so Jumpy?” post published on October 16, 2010 garnered a lot of emails from clients, many of whom expressed outrage with my supposed presumptuousness in that post. A few people told me that everyone was jumpy because of all the negative financial news and the never-ending media reports of the almost assured U.S. economic catastrophe that they believe we are facing.

There is almost universally good news about the economy. I agree that it’s not great, but it’s also not catastrophic. In the last few days, it was announced that the GDP’s growth for the third quarter of 2010 was at 2%. This means that the last five consecutive quarters have reflected gains in the GDP, which should be encouraging to even a doomsday reader.

Thirty-year fixed-rate mortgages in Atlanta dropped below 4% last week. Even though there continue to be reports that the Federal Reserve wants to push down interest rates further, it is hard to believe that right now you can secure a 30-year mortgage at a sub-4% interest rate. If you are buying a home today, you can easily do so.

Corporate profits in America are nothing short of breathtaking at the current time. Corporate America is reporting unheard of profits in the history of American finance. As I have stated in several prior posts, corporate profits lead to higher stock prices.

I've had conversations with several of my clients this week about investing additional money in their portfolios. Unfortunately, I heard all too often that they were leery of doing so because of the horrible economic news being reported by the media. Sadly, many of them are scared to invest. My answer to their concerns is that there is rarely a better time to invest than when times seem bad. Here are a few quotes to illustrate my point:

“The time to buy is when there’s blood in the streets.” – Baron Rothschild

“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett

As we all know, yesterday was the mid-term election day. I’ve fielded a lot of calls from concerned clients who ask my opinion on the potential impact to the stock market from the election results. Frankly, I think that the market will go down for a few days regardless of who wins. There’s an old Wall Street saying that would definitely come into play here: “Buy on the rumor; sell on the news.” Once the news is out, the market will go down for a short period of time, but this will only be a temporary adjustment.

The trend in the market is clearly up, as the two very strong months of September and October have illustrated. If the market does pull back after the election results – regardless of who wins – you should be a buyer in that market.

Over the last few days, I have had no choice but to watch way too many political ads and commentators on the election. The one thing that seems to be missing in politics today is a candidate that is fiscally conservative but socially liberal. We seem to have a choice of either the far right or the far left, but no real moderate candidate. The Democrats are free-spenders who are greater advocates of individual freedoms. The Republicans are more fiscally conservative but seem to meddle in citizen’s private issues. I’m more interested in someone who will stay out of our wallets and our bedrooms. If that candidate ever arrives, I’m going to bet that he or she will be wildly successful.

Our current leaders are learning the hard way that they do not have an unlimited checkbook to spend and pay back their political allies. Because of that, the next two years will likely be much more fiscally conservative, and I cannot help but think that will be a good thing for stocks and for the U.S. economy.

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

Best regards,
Joe Rollins

Important Disclosures
Rollins Financial's investment results noted above are actual historic returns as represented by our entire portfolio of assets under management. They are neither the best nor the worst portfolios; they are simply the average of all of our portfolios combined. Data presented reflects past performance, which is no guarantee of future results. Investment results and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. These results also do not include the effect of our management fees on investment results. The results do, however, include all fees charged by mutual funds and any expenses charged by account custodians.

Tuesday, November 2, 2010

Q&A Series - When Should I Start Drawing Social Security Retirement Benefits?

This week's question comes from Jane, a reader pondering her Social Security retirement benefit options.

Q: I’ll be 66-years old in February of 2011. I am still working, and to this point, I have not drawn any early Social Security retirement benefits. My most recent Social Security statement indicates that I’ll be drawing $2,356 per month at full retirement age, but if I wait until I turn 70, my monthly benefit will be $3,096. Should I start drawing benefits when I turn 66 or would it be better for me to wait until I’m 70?

A: This is an interesting question, Jane, and a topic that I’m asked frequently about – Social Security retirement benefits. There’s a lot to consider when it comes to deciding when it will be best for you to start collecting these benefits, and it’s important to think carefully about your personal situation when figuring out which route to take.

Your choices are to start collecting retirement benefits early at age 62 (which you have decided not to do – I’ll talk more about that option in a future post); wait until you reach full retirement age (between 65 and 67, depending on your birthdate), or; hold off even longer (you can continue earning delayed retirement credits, which increase your benefit amount, until age 70). Some important questions to consider are:

• What are your current cash flow needs?
• How much do you anticipate needing in retirement?
• Are you in good health?
• Do you plan to continue working in retirement?
• Do you have other forms of retirement income?
• How much would you receive in the form of a Social Security benefit?

For illustration purposes, I’m going to assume that Jane is single and will have some other form of income (either retirement income or from continuing to work) that will take care of her cash flow needs. Therefore, the Social Security benefits she receives would simply supplement her income.

From the information Jane provided, she would clearly receive a higher monthly benefit - $750 more per month – if she waits until she turns 70 to start collecting Social Security retirement benefits. However, the risk in waiting to start collecting benefits until age 70 is that if she dies before then, she will have received nothing and her beneficiaries would be left nothing via her Social Security.

In a similar scenario provided by the Social Security Administration, they indicate that if a person retires at full retirement age (age 66 in this scenario), the accrued benefits after four years would be $112,608 ($2,346 x 48 months). If you divide $112,608 by the additional $750 per month you would receive by waiting to collect benefits until age 70, then it would take 150 months (12½ years, or until age 82½) to reach the breakeven point (not considering the time value of money) between collecting benefits beginning at full retirement age or waiting until a person turns age 70.

Therefore, at age 82½, a person’s accrued additional payments for waiting until age 70 to start drawing benefits is exactly equal to the first four years of total payments received by a person who begins collecting at age 66. By this illustration, it appears that if you live beyond age 82½, you would be better off starting retirement benefits at age 70.

In my opinion, there is an excellent alternative that many of our clients are taking advantage of today and that warrants your consideration. If you save 100% of your Social Security retirement benefits from age 66 through age 70 while you are still working or have other forms of retirement income and earn 5% per annum, you would have an accumulated balance at age 70 of $124,891 ($2,346 x 48 months = $112,608 + $12,283 interest). Then, at age 70, if you start withdrawing the $750 difference from this account on a monthly basis but still earn 5% on the remaining balance, it would take 23½ years to get to the breakeven level using the age 70 monthly benefit amount. With this method, if you were to die early, then you would still have a nest egg to pass on to your beneficiaries.

As you can see, by using this method you could live to age 93½ (11 years longer) before it would have been better to wait until age 70 to start drawing Social Security retirement rather than starting benefits at full retirement age. While we hope all of our clients live at least that long, it’s highly likely that many will not.

In short, if you properly invest your Social Security benefits, we believe you are always better off starting them at full retirement age rather than at age 70. However, if you intend to spend all of your benefits as they are received, you would be better off waiting until you are age 70 to start drawing your retirement benefits.

Jane, I hope my explanation above has given you some understanding of when and how we suggest individuals start drawing Social Security retirement benefits. It’s always best to thoroughly evaluate your particular situation to determine the best way to maximize your own benefits, and in that regard, Rollins Financial is here to help. Navigating Social Security benefit options can be tricky, but we can help you make the best decisions to positively impact your retirement years.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Tuesday, October 26, 2010

Q&A Series – College Savings Plans

This week's question comes from Lynn, a young mom who is wondering about 529 plans for her son's college education.

Q: Everyone keeps telling me that my son will be heading off to college before I know it. Considering how fast his first two years have flown by, I can see that this will be true. You seem to recommend that parents open 529 plans to save for a child's college education. What makes them such a wise option compared to other college savings plans?

A: If there's one topic we're asked about most frequently, it's 529 plans. It's true that we encourage people to save for a child's college education by opening 529 accounts.  They are tremendously powerful savings tools, and if you are going to save and invest for your child's education, then a 529 plan is the best tax-advantaged way to do so.  

529 plans are college savings accounts wherein the investment income not only grows tax-free, but can also be withdrawn tax-free when used for qualified post-secondary educational expenses. These expenses include tuition, room and board, books and supplies, computers and Internet access, and the funds cannot be used for primary or secondary education. Couples can contribute up to $130,000 over five years ($65,000 for single parents) without generating gift taxes, and some states allow up to $300,000 in total. We believe that it is appropriate to have a minimum goal of $100,000 in a 529 plan to adequately provide for a child's college education. 

Another benefit of 529 plans is that the assets are considered to be the parents', not the child's. This is usually more advantageous than just keeping the money in your name. It also makes qualifying for financial aid a little easier than if the assets were held in a custodial account in the child's name since a child's assets are more heavily weighed when financial aid decisions are made.

Moreover, if a child doesn't use the assets from their 529 plan, those assets can simply be transferred to other children -- even if they are not related -- without incurring a penalty. And anyone -- whether it is the child's grandma, grandpa, aunt, uncle or a non-relative like a close friend or godparent -- can open a 529 for a child.

We believe that the best way to fund a 529 plan is by making electronic transfers directly from your checking account into the 529 plan (Rollins Financial can set up an electronic transfer for you at no cost).  If you opened a 529 plan when a child is born and electronically transferred just $100 into that child's 529 plan each month, then by the time the child turns 18, you will have accumulated $38,929 in the account (assuming a 6% interest rate).  At $200 per month, you will have accumulated $77,858, and at $300 per month, you will have accumulated $116,787 by age 18.  

Most people reading this post can likely afford some level of contribution for a child's education, but since relatives and non-relatives alike are also able to contribute to 529 plans, perhaps you will be lucky enough to receive some assistance in meeting this important financial goal.  Even if a child's grandparents are not alive at the time he or she enters college, there could be no greater tangible gift than assisting in financing a grandchild's education.

There are two types of 529 plans: "prepaid" or "savings" accounts. The advantage of prepaid plans is that you can pay a child's future tuition at today's rates; the disadvantage is that prepaying a plan will likely lock you into a state's or a specific college's higher education system.  Some states, but not all, do allow for refunds plus interest if the child changes his or her mind. Also, prepaid plans often don't cover secondary expenses like computers and Internet charges -- indisputably necessary tools for college classes -- and plan administrators invest all of the assets.

On the other hand, 529 savings plans are much more flexible. Simply put, you choose how to invest the assets from selected options. At the time the child enters college, you use the account to pay for his or her higher education. In all instances concerning 529s, the institution must be an accredited college or university. Also, the assets must be professionally managed, and depending on the plan, participants can choose from up to 30 mutual fund-type investments that can be changed once every 12 months.

Another type of college savings plan is the Coverdell Education Savings Account (ESA). In this type of account, the distributions are tax-free, you can invest the funds however you wish without using a money manager, and the funds can be used for primary, secondary and post-secondary education expenses. Unfortunately, contributions are limited to $2,000 per student per year; contributors earning more than $110,000 (single filers) or $220,000 (joint filers) do not qualify; the contributions are not tax deductible, and; the assets are considered in the financial aid calculation since they are considered to be an asset of the child. In our opinion, Coverdell ESAs are inferior to 529 savings plans.

Like any investment, 529 plans do have their risks, and it is possible to lose money by investing in one of these plans. However, we don't think the risks are great enough to avoid dipping your toes into these investment waters. Rather, we suggest that -- if your children are young and unless your child is due to begin college next fall -- you should dive in to this typically rewarding college investment plan option.

Obviously, all college savings plans are not created equal. It's imperative that you sit down with an investment advisor to evaluate your objectives, the types of investments offered, and any plan expenses before making your decision.

Lynn, we hope we have provided you with some useful information regarding 529 plans. If you would like for us to take an in-depth look at your particular situation, Rollins Financial's investment advisors are always available.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Thursday, October 21, 2010

Q&A Series – Health Savings Accounts and Flexible-Spending Accounts

This week’s questions come from Ken, a client who is interested in learning more about Health Savings Accounts (HSAs) and Flexible-Spending Accounts (FSAs).

Q: Please explain Health Savings and Flex-Spending Accounts.

Open enrollment time and health-care reform have caused many folks to take a look at HSAs and FSAs and see if they might be a good option for their particular situations.

So, what are these accounts, and what are their advantages and disadvantages? A Health Savings Account (HSA) is just that – a savings account established by individuals and employers wherein the money contributed is used for medical purposes. HSAs are advantageous because the funds are not subject to federal taxes when deposited and the contributions are tax deductible (up to the maximum contribution amount set each year and only if you are not enrolled in Medicare Part A or Part B). Furthermore, the contributed funds grow tax-free and the withdrawals utilized for qualifying medical expenses are also tax-free.

HSAs are especially attractive because the funds roll over from year to year, meaning that whatever funds you don’t withdraw from the account can build over time. You are also not mandated to seek reimbursement for your medical costs from your HSA each year. Therefore, instead of turning in your minor expenses for reimbursement from your HSA, you can continue growing the account so that you will be in a better position to pay for any expensive medical costs that arise down the road. Additionally, like an IRA, you can invest your HSA money in stocks, mutual funds and bonds, which provides for further tax-free growth potential for use specifically on health expenses.

The theory is that when you pay your own medical costs, it makes you use medical services less (which is a good thing). Proponents believe that HSAs are important to reducing the overall cost of health care and making the health care system run more efficiently.

It’s important to keep in mind that you can only qualify for an HSA if you have a health insurance plan – specifically, a High Deductible Health Plan (HDHP). HDHPs have low monthly premiums, but cost more in out-of-pocket expenses. However, these expenses can be paid for with your HSA. The deductible must be at least $1,200 for single coverage or $2,400 for family coverage to qualify.

Flexible Spending Accounts (FSAs) are offered by employers to assist employees in saving a percentage of their earnings on a pre-tax basis to pay for medical and dependent care expenses, reducing the amount of the employee’s income that is subject to tax. The dependent care portion of FSAs is invaluable, as it helps subsidize child care costs for working families up to a maximum of $5,000 per year, tax-free.

FSAs are different from HSAs in that you don’t need to be covered by an insurance plan in order to have an FSA. You also must spend all of the money you have contributed within the coverage year, as whatever remains at year-end is forfeited. In other words, you must “use it or lose it.”

Basically, the employee calculates his or her medical and dependent care out-of-pocket expenses for the year to determine how much they want withheld from each paycheck (the figure should be fairly conservative to avoid any potential forfeitures at year-end). The employer holds these savings in a special account and, as the employee incurs medical and dependent care expenses, he or she submits to the employer the provider’s invoice along with proof of payment. The employer then issues a reimbursement check to the employee out of the special account. Easy peasy, right?

Q: Can you have both?

In general, no. But in particular situations – like if your FSA is limited to preventive care, vision or dental (“limited purpose”), or only pays for medical expenses after the HDHP deductible is met (“post-deductible”) – then you may still be eligible for an HSA. Furthermore, if your spouse has an FSA or HSA through his or her employer that pays any of your expenses before your HDHP deductible is met, then you cannot have an HSA.

Q: What will the new limits be?

The health-care reform bill actually made very little changes to HSAs, the biggest being the increase in penalty from 10% to 20% for withdrawing the money for nonmedical expenses before age 65 which will take effect in 2011. Also, beginning in 2011, over the counter drugs that are not prescribed by a doctor – except for insulin – are not reimbursable expenses under HSAs or FSAs.

By far, the biggest change concerns the maximum allowable contribution to FSAs. In years past, there was no maximum contribution amount for the medical portion of FSAs (although most firms capped contributions at $5,000 per year). Beginning in 2013, however, annual FSA contributions for medical expenses will be limited to $2,500 per year, making them less appealing. Contributions for dependent care expenses under FSAs will remain capped at $5,000.

On the other hand, HSA contributions will continue to be determined by the cost of living. For 2011, individuals with employee-only coverage can contribute up to $3,050 while those with family coverage can contribute up to $6,050. If you’re 55 or older, you can also make a $1,000 catch-up contribution. Furthermore, the maximum reimbursement amount for 2011 under HSAs, including deductibles, will be $5,950 for single coverage and $11,900 for family coverage.

Ken, I hope my answers above have given you and our other readers some insight regarding HSAs and FSAs. There are pros and cons to each type of account, and therefore, it’s important to assess your health and financial circumstances to determine if one or the other – or both, in limited circumstances – is appropriate for you.

We encourage our clients and readers to send us questions for our Q&A series at And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Tuesday, October 19, 2010

Congratulations Josh!

From the Desk of Joe Rollins

I am excited to report that my son, Josh, celebrated his most recent golf victory this past weekend at the Druid Hills Junior Championship, winning the tournament with an incredible two-day score of 147. Congratulations, Josh!

On Saturday, Josh had five three-putt greens, but still had a fairly consistent round, scoring 75 for the day. On Sunday, Josh’s momentum picked up and his game really started to excel. He shot a 32 on the front nine – four under par –and 40 on the back for an incredible score of 72 (including one Eagle) for Sunday. His nearest competitor at Druid Hills was Mitch Fenbert, who is one of Josh’s closest friends. Mitch also played great at the tournament, shooting 151, just four strokes behind Josh.

With this most recent victory, Josh has now swept the two junior championships that he has competed in this year. Earlier, Josh won the Ansley Junior Championship (see the post here), and has now added the Druid Hills Junior Championship to his golf accomplishments.

Someone asked me this morning if I attributed any of Josh’s success in golf to my training. Given that I have only broken 80 one time in my illustrious career, I think Josh has far exceeded my golfing ability. Additionally, only a few years ago I was trying to keep Josh from making sand angels in the sand traps during our rounds. It’s amazing how fast kids grow up!

Well done, Josh! I am very proud of you.

Sunday, October 17, 2010

News - October 2010

How low can you go? Bond yields are doing their own version of the limbo as the Federal Reserve threatens another round of quantitative easing; and, for now, prospects for widespread inflation seem muted. In general, “quantitative easing” (QE) is the buying of mostly government- and mortgage-backed bonds by the Federal Reserve in order to influence interest rates lower. The Bank of Japan has even gone a step further and announced their intention to not only buy government fixed income securities, but to also buy privately issued assets like corporate bonds, exchange traded funds, and real estate investment trusts.

The 10-year treasury yield is hovering around 2.5% after rising as high as 4% earlier in 2010. Low rates are typically an indication of low future economic growth, or very low expected future inflation, or a combination. Clearly, the QE is playing into rates also and it’s greatly debatable as to how much of the recent drop in interest rates is attributable to the Fed’s actions, inflation expectations and economic expectations. Some have argued for some time that the various fiscal and monetary stimulus programs are a prelude to significant inflation down the road. But the bond market doesn’t seem to be corroborating that popular thesis, even in light of slightly higher rates in recent days.

Falling bond yields continue to be a boon for investors holding fixed income securities. The BarCap Aggregate Bond Index has advanced 7.9% for 2010 through September 30th. Earlier this year, Bill Gross, the famed bond investor, seemed to indicate that the bond bull market of the past 30 years was drawing to an end and predicted rates would move higher. Six months after Mr. Gross made his prediction, all signs are pointing to the great bond bull market stretching for at least 31 years.

Stocks rose dramatically during the month of September. Fresh off a downdraft in August, markets have alternated between positive and negative monthly returns for the past several months. Stocks advanced during the third quarter just as the chorus for a possible double-dip began to grow a little louder. That song has been quieted a bit for now.

The widely followed Dow Industrial Average is within earshot of the 11,000 mark again after advancing 7.9% for the month and 5.6% for 2010. The S&P 500 is now positive by 3.9% through September 30th for all of 2010 after an 8.9% advance just for the month of September. Small cap stocks outpaced the large cap indexes during September, rising 12.4%, and have gained 9.1% YTD through September 30th.

Developed international stocks posted a strong September as well, rising 9.8% for the month to just barely enter positive territory for the year at positive 1.1%. Emerging markets have fared better than other international investments, advancing 11.2% for the month of September, and have logged a gain of 10.6% for the year. We are seeing some wide discrepancies regarding emerging stock market returns this year as India has far outpaced the gains of its BRIC brethren.

Real estate investments have been the top performer all year despite continued softness in the housing market. Through September 30th, real estate has gained 18.8% for the year, although the category is showing some signs of weakness as the broader stock market gains over the past month have significantly outperformed this sector. REITs are a diverse group as some specialize in apartment housing, operating shopping malls, or commercial real estate, for example.

Gold has continued its decade long run this year. The precious metal has advanced 18% for 2010 as of September 30th. While gold is generally thought of as an inflation hedge, other indicators seem to be flashing muted inflation for some time to come. Long-term U.S. Treasury bond yields have fallen significantly since earlier this year.

Conversely, Financials and Energy/Natural resource stocks have lagged the broader market in 2010. For financial stocks there has been yet another renewed concern over foreclosures and their impact on bank stocks. Clearly the system is not built to process the current massive number of foreclosures and financial institutions are having difficult time adjusting. A recent characterization attributed recent problems to the contrast between our complex system of securitizing mortgage debt with antiquated property laws.

The final employment report before the midterm elections was released and the results were mixed at best. According to the Labor Department, the economy lost 95,000 jobs during the month of September. Private sectors actually added jobs again, although less than the prior month and not enough to bring down the unemployment rate. Governments shed both temporary and permanent positions which overwhelmed the overall jobs picture.

It seems we are in a perpetual “wait and see” mode with this economic recovery. We observe many crosscurrents in the various financial markets and economic indicators. Stock prices have moved higher as corporations have become healthier, leaner and more profitable, but housing prices have only stabilized at best. The economy has stopped shedding jobs, but has not yet starting producing enough jobs to bring down unemployment and increase confidence. Commodity prices are indicating higher inflation and demand, while bond markets suggest the opposite.

To be sure, we are facing an uncertain future, but that has probably been the case and an asset for investors during most of our history. Certainty in the success of investing in stocks or the success in our real estate purchases has almost always been a precursor to a serious correction if not outright collapse in prices. So, uncertainty is good in that it suppresses current asset prices and very well may imply better future returns on those assets than we expect. We hear much about the “certainty” the election in a few weeks will bring. We suppose that elusive state of “certainty” may persist for a couple months perhaps, just until our focus is trained on the next election.

Saturday, October 16, 2010

Why Is Everyone So Jumpy?

From the Desk of Joe Rollins

As I’ve said before, the general public’s fearfulness that the economy is falling back into recession is baffling. I have seen no economic evidence to support that fear, and why the anxiety continues accelerating is a mystery to me. In fact, there is overwhelmingly good news about the economy. Clearly, investor anxiety is running amok.

In a recent New York Times blog post, "The Recession Has (Officially) Ended," it was stated that a vast majority of U.S. investors have abandoned investing altogether. I suppose that just goes to show that small investors tend to do exactly the wrong thing – invest when the market is at a high, stick around long enough for their portfolios to go down, sell out at the bottom and then never reinvest. Small investors who have not reinvested since March of 2009 have missed a cool 85% increase in the stock market.

Through Thursday, October 14, 2010, the S&P 500 Index was up 6.8%. Through the same time frame, Rollins Financial’s total portfolio under management is up an even more impressive 9.84%. Therefore, through the first 10 and a half months of 2010, our managed accounts are outperforming the S&P 500 by approximately 44%.

If asked how the stock market has been doing for 2010, most people would likely tell you that it continues to lose money. My guess is that these are small investors, and as I stated above, they are usually wrong.

The following are some positive attributes for the stock market going forward:
  • First and foremost, it was recently announced that the recession ended in June of 2009, almost 15 months ago.
  • Interest rates are extraordinarily low. Furthermore, the 30-year home mortgage interest rate has fallen to its lowest level ever. Earlier this week, you could obtain a 30-year fixed mortgage at a rate of 4.18%. Long-term interest rates have never been this low in the history of the United States. If you have not refinanced your mortgage to get this low rate, you are giving up one of the greatest all-time government subsidies.
  • Even though we’re in the early stages of reporting earnings for the 3rd quarter of 2010, the earnings that have been reported are nothing short of breathtaking. Corporate earnings will be the highest ever recorded in American finance next quarter. Why? Because corporate America is operating more efficiently with less overhead and less administrative costs than in its entire history.
  • Corporate America is sitting on a cash balance of nearly $1.8 trillion. When business finally improves, you may rest assured that corporate America will allocate these assets to higher earning investments. Corporate America cannot sit on this high level of cash balances when it earns next to nothing. Corporate America will soon use this cash to buy other companies or make investments that pay many times the rate of cash. The only thing necessary for these businesses to allocate capital is to develop some level of confidence.
  • U.S. investors are saving and paying down debt at unprecedented levels. The American consumer is finally deleveraging himself. For the first time in over a decade, American consumers are saving more and using their significant cash flow to pay down debt. While these actions are a short-term drain on investing, they are very much a long-term positive for the American consumer. Even this morning, retail sales for September reported a strong 0.6%. August retail sales have been revised up to 0.7%. Retail sales would not be increasing unless the consumer was starting to feel a little more confident about their job situation.
  • It was announced this week that the infamous Troubled Asset Relief Program (TARP) could potentially make money. It’s currently projected to lose about $18 million, but if the car companies are able to complete an initial public offering, there is a chance the TARP will show a profit. You may recall that when the $787 billion TARP was proposed, it was considered to be a complete waste of money that would be totally lost by the U.S. government. There weren’t many who thought it would ever break even, but I am one of the few who did believe that investing in American banks would be profitable. Don’t believe me? Read my September 24, 2008 blog - "This is Not a Bailout!" It’s rewarding to be proven correct when so many economists argued that the entire amount would be lost and wouldn’t help the economy anyway.
  • The Federal Reserve Bank of New York released its Empire State Manufacturing Survey this morning. It was expected to be in the 3% to 6% range, but came in at the breathtaking rate at 15.73%.
  • In recent weeks, the U.S. dollar has fallen off a cliff and gone down in value. While that may sound like a negative, it’s actually very much a positive. When the dollar is low, U.S. companies compete in international commerce by exporting more. As we manufacture to export more, this creates jobs and a better U.S. economy.
  • The mid-term elections will likely create complete gridlock in Washington, which is usually a plus for the stock market. From the polls, it appears that the Republicans will take over the House by several positions and the Senate race will be a dead heat, although it doesn’t appear that the Democrats will lose control of the Senate. As far as I can remember, the best investing years were from 1994 through 2000. During that timeframe, Bill Clinton (a Democrat) was in office, but almost nothing could get through the Republican-controlled Congress. Gridlock in Washington is as good as it gets for investing. Come November, we are almost guaranteed total political gridlock. Since it will be almost impossible to get anything accomplished, perhaps both the House and the Senate should just take a two-year vacation.
There may be negatives in our economy affecting investing, but they are few in comparison to the positives listed above. A few of the negatives affecting the economy that could impact the stock market are as follows:
  • Unemployment continues to be stubbornly high. Even though the economy has clearly recovered, unemployment rates are not going down anytime soon. Until there is a higher level of business confidence, you will not see employers hiring the many people who are out of work. While it is unfortunate that unemployment is at 9.6%, it appears that the 90.4% who are employed are spending more and feeling better about the economy, thus, increasing retail sales.
  • The federal deficits, over the short-term, are not really a problem, but they can become a long-term disaster if allowed to continue. Based on Washington’s current projections, the deficit could approach $10 trillion over the remainder of this decade. Clearly, the public has spoken and the trend is changing in Washington. I expect a new attitude in Washington regarding deficit spending, and hopefully, there will be a long-term plan initiated. The budget doesn’t need to be balanced, but a plan does need to be created to work toward balancing the budget. It’s interesting to see Great Britain actually cutting their government expenditures by 25% in one year alone. Perhaps Great Britain will be an example of what we should and could do in the United States. However bad the deficits appear to be now, it appears that there will be a new sheriff in town in November, which will hopefully help us get back to some sense of normalcy.
A client told me the other day that the increase in the stock market was really a house of cards. Given that this client makes his living in commercial real estate, I can understand his skepticism. While there are certain pockets of our economy that are in desperate straits, it’s quite unusual to see such skepticism by the general population while corporate profits are at historic highs. Hopefully, if you avoid the “gloom and doom” reported by the media and instead review the facts regarding the economy, you will see that while the economy isn’t great, it is on solid footing.

Something that has clearly been missed in this stock market rally is that extraordinarily high profits and low interest rates make stock investing much more desirable. I see nothing on the horizon that would change any of those thoughts regarding investing.

Speaking of investing, have you made your IRA contributions for 2010 yet?

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