Tuesday, December 22, 2015

Closed for the Holidays

Wishing you laughter and cheer all during the season and through the New Year!


In celebration of the Christmas holiday, our office will be closed on Thursday, December 24th and Friday, December 25th. Our regular office hours will resume on Monday, December 28th.

AND, in celebration of the New Year holiday, our office will be closed on Friday, January 1st but will resume normal office hours on Monday, January 4th.

If you have a matter that requires immediate attention while our office is closed, please contact Joe at jrollins@rollinsfinancial.com.

You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com or Robby Schultz at rschultz@rollinsfinancial.com.

Warmest Thoughts and Best Wishes for a Wonderful Holiday and a very Happy New Year!

Best Personal Regards,
Rollins Financial, Inc.

Friday, December 11, 2015

The market wants to move higher.

From the Desk of Joe Rollins

The month of November 2015 was basically a non-event in the financial markets. However, any month that records a positive return should be celebrated. With the massive sell-off that we saw in the equity markets during August and September, it was certainly great to have the turnaround we enjoyed in October. The month following a large turnaround gain is critical for determining whether there will be additional advances, or whether the previous one-month gain was an aberration.

Fortunately, November was up and it appears the trend in the market is positive rather than negative. There are a lot of very optimistic aspects to this market, although that is hard to ascertain from the very negative financial press. Before I get into that analysis, I need to report the actual numbers for the month of November.

The Standard & Poor’s index of 500 stocks was up 0.3% for the month of November and for the year is up 3.0%. The NASDAQ composite was certainly the winner in the major indexes during November, up 1.2% and has advanced 9% for 2015. The Dow Jones industrial average is up 0.6% for November and up 1.6% for 2015.

As would be expected with higher interest rates being passed down, the Barclays aggregate bond index was down 0.2% for the month and up 0.8% for 2015. It is fairly clear that interest rates are likely moving up, and as you would expect any price movement in the bond index would be opposite that, therefore negative. My anticipation is that bonds will have a negative rate of return for all of 2016, if the Federal Reserve continues to increase interest rates, as I believe they are most likely will do.

The actual chair from JFK's oval office.

There has been quite a bit of discussion in the financial press about the U.S. economy and how it “continues to teeter on slipping into recession.” Once again, I have no idea on what statistics those negative reports are being based. As I told you in my last commentary on the financial markets, I thought the GDP had been incorrectly stated at 1.5 and would be adjusted. In fact, I was correct and during the month they revised the GDP up for the third quarter from 1.5% to 2.1%. It is very difficult for the government to assert the value of inventories once completing its quick report on the GDP. As the months pass from the third quarter, a better read on inventory is gained and adjustments are made. It still appears to me that the return rate on the GDP is in the 2+ range, and while not great, certainly not negative.

The financial press continues to over report that the U.S. is in a manufacturing recession. With the strength of the U.S. dollar putting us at a competitive disadvantage while exporting goods to international clients, it is to be expected that manufacturing would in fact be down. Empirical evidence does indicate that the durable manufacturing index is down 2.86% over the one year period. Additionally, capacity utilization is down 2.27%, and therefore is clearly lower than the prior year. It certainly does not seem to be a trend for either of those indexes to fall off the cliff at current time.

What is most misleading to people about manufacturing is that it is a relatively small part of the U.S. economy. At one time manufacturing made up a major component of U.S. employment. Today, manufacturing only constitutes 15% of the entire US economy, and therefore a slight reduction in that capacity would not have a great impact to the GDP. Conversely, services make up an increasing portion of the total economy and are not reflected by manufacturing data.

For some reason, people believe that the significant reduction in the price of oil will negatively affect the U.S. economy. Certainly if you work in the oil industry, or if you are a supplier to the oil industry, the downtrend is negative. But let us assume, for hypothetical reasons, that 10% of the whole U.S. either manufactures items going into the oil industry or works in that industry - wouldn’t that mean that the remaining 90% of the population of the U.S. would benefit from lower prices?!

The price of oil affects virtually everyone, every day. The price of food on the shelves is impacted by transportation cost and the gasoline in your car and virtually everything you buy, consume or use in your everyday life is impacted by the cost of petroleum. Therefore, for 90% of the population, this reduction is very much a positive.

Having begun work in the 1970s, I vividly remember when the cost of inflation was in double-digit ranges. I also remember economists explaining the dangers of recession. Many of the comments would point out that the German Army during World War II was paid in cash. Because inflation was virtually higher every week, their currency would be depreciated so it was important to get their pay to them as quickly as possible. We all benefited when inflation increased the value of real estate, but we all understood the negative effects of everything else increasing, while incomes were stagnant or decreasing.

Based upon the most recent information, the rate of inflation is increasing at a 0.2% annualized rate. Therefore, there is no inflation, which is very good. The employment cost index is actually going up at 2.25% and the unemployment rate is now at 5%. There are 2 million more Americans working today than were working only one year ago. Therefore, the trend is mostly positive for employment. Constituents working, the cost of inflation near zero, while wages and other benefits are moving higher - you do not need to be a rocket scientist to understand those three attributes will be positive for the GDP going forward.

One of the most confusing aspects of understanding economic data is trying to get your hands around what items are important and what items are not. I often see so-called economists on TV spouting off one component or another of the GDP and expressing their opinion regarding future performance. Try to separate reality from fiction...

The most important component of the GDP in the United States is personal consumption. It is a percentage of the GDP greater than one half. Personal consumption by the government’s own index was up 3.15% year over year. Therefore, if you consider the facts (1) more Americans are working and the value of their salaries is increasing, (2) there is no measurable inflation and (3) everyone is benefiting from a reduction in petroleum prices, it is fairly clear that future GDP should increase. Given the unbelievably low interest rates in our economy, while also considering the potential increase in December, every working American should be better off this time next year than they are today.

I could provide you with more on Economics 101 as well as statistics to support my analysis, however, few warrant discussion in this matter. Recall that I indicated that personal consumption was up 3.15%, but also note personal savings was up dramatically from 4.6% a year ago, to 5.6% this year. Personal income is up 4.69% year on year. If you read the numbers as I do, it is fairly clear that Americans are becoming more conscious regarding savings, while consuming at a higher level. The only way this is conceivably possible is if wages are going up (and they are) and the consumers’ costs are going down in conjunction with lower inflation and low interest rates. All of this in a word is good for the U.S. economy, and as more and more Americans go to work, the spreading of the wealth effect should have dynamic positive impact on future GDP.

As I often write in these postings, higher stock prices are driven by three major components. As we sit here in November and December 2015, while the financial markets are not up dramatically this year, they are still higher. In evaluating our three important indexes, we know that interest rates are extraordinarily, if not outrageously, low at the current time. We also know that corporate earnings, excluding gas and oil, are up dramatically year-over-year, even including the outrageously high dollar index hurting U.S. manufacturing and exports. And as illustrated above, the economy continues to be strong and may even be getting stronger. While volatility is an everyday occurrence, it appears to me that this market wants to go higher and is likely to do so. The talk of an impending recession is just filibuster, not supported by facts.

I am often confronted with clients citing one geopolitical event or another as a reason not to invest more of their money. Needless to say, we can never invest for geopolitical events since nobody knows when they are going to happen, what effect they would have on the financial markets, or whether they are totally meaningless in the long-term effect. All of these so-called pundits were shocked when the financial markets went up after the Paris massacre. How many of you were invested on 9/11, when the markets dropped due to the attack on America? Rarely do people mention how quickly the markets recovered after that downturn.

All of us remember 2008 and the sharp decline we suffered that year. How many of you are aware that the markets are up 200% since then? When you invest, you invest for economic reasons not geopolitical events. The one great service we think we perform is evaluating those economic performances, and hopefully seeing the potential downturn before it occurs.

Thanksgiving 2015


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

Best Regards,
Rollins Financial, Inc.

Thursday, December 10, 2015

Proactively Contributing to your IRA Can Earn You an Extra $75,000!

It is almost that time again; the year is coming to a close and you are wondering if you did everything you could throughout the year to help minimize your current or future tax liability. And then the panic sets in with all the talk about New Year’s resolutions, and you start wondering if you are doing enough to save and plan for your retirement.

If you have already contributed to your IRA for 2015, then you are already a step ahead of a lot of your peers. While you have until April 18, 2016 to make your 2015 contribution, we do not recommend waiting until the last possible day to make a contribution for your future. In the past, many of you have received some form of communication from Rollins Financial suggesting you should make an IRA contribution early in the year. Many, undoubtedly, wonder, “What’s the rush?” Although you actually have until the tax filing deadline of the following year to make your IRA contribution, we find it to be in your best financial interest to make the contribution on the first business day of the year (which for 2016 is January 4th).

As we all know, stocks do not rise in value in a straight line. Overall, the financial markets during 2015 have been pretty flat. The market was up nicely early in the year, then down during the summer and back to even this fall. Seasonally, the six months spanning from November to April have historically been the best performing months for the stock market. If you were to wait until April of the following year to make your contribution, you would risk missing out on what could potentially be significant appreciation in your retirement account.

Of course if we actually knew ahead of time the best day out of the 15 ½ month window to make your IRA contribution, we would obviously suggest you make it on the day when you can purchase additional investments at the cheapest price. Unfortunately, the daily gyrations of the market are terribly unpredictable.

That being said, let’s focus on the likeliest scenario. Stocks have produced positive annual returns in approximately 72% of the calendar year time periods since 1926. In fact, 11 out of the past 12 years (including 2015 so far), the S&P 500 has produced positive returns. The probabilities suggest that there is value in contributing as early as possible. And here’s why….

As an example, let’s make the following assumptions:

1. Our Expected Return for U.S. stocks is 8% annually (some years will be higher and some lower, but we will expect this average over the next 35 years).
2. Each Participant will make an annual lump sum contribution of $5,500 to their respective IRA.
3. Each person will retire at 65 (we will use this as the year-end age).
4. This is their only means of savings.

If we make the noted assumptions, you can see the results in the following table.


After reviewing the table, you will notice the savers, who choose to invest their IRA contributions at the beginning of the year and are exposed to the 8% return for the entire year, will realize higher returns. The 30 year old who contributes and invests for 35 years realizes total returns of over $75,000 more by making his/her contributions early in order 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 nearly $12,000 more than if he/she had waited and contributed at the end of the year.

I also performed the same test for those of you who can contribute to a SEP-IRA. Since SEP-IRA contribution limits are much higher, the potential benefits are also greater when making early contributions. Let’s start with the assumption that a 40 year old with 25 years until retirement can contribute $30,000/year annually to a SEP-IRA. This hypothetical investor could end up with an IRA balance at retirement containing an additional $175,000 in value by making his/her SEP contributions at the beginning of the year vs. waiting until the tax filing deadline to make the contribution.

What is the moral of the story here? Be proactive – if you can, do not procrastinate making your annual IRA contributions. Make the most of your annual IRA contributions; do not wait until the end of the year or until the filing deadline in April to make your contribution.

Thank you again for visiting RollinsFinancial.com, and we hope this update has been useful to you. Please feel free to email us and provide us with your thoughts and comments.


Best Regards,
Eddie Wilcox, CFA, CFP®

Wednesday, November 25, 2015

Happy Thanksgiving!

In celebration of the Thanksgiving holiday, the offices of Rollins Financial and Rollins & Van Lear will be closed on Thursday, November 26th and Friday, November 27th. Our regular office hours will resume on Monday, November 30th at 8:30 a.m.


If you require immediate assistance during this time, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com.

Be safe, have a wonderful thanksgiving and please know we are very thankful for you!

Warm Regards,
The Staff of Rollins Financial

Tuesday, November 3, 2015

As Predicted - Great month for the world's stock markets!

From the Desk of Joe Rollins

It has only been two short months since the financial press screamed that the world as we know it was coming to an end. We got up almost every day during July and August and saw headlines predicting some sort of financial calamity in the U.S. economy. You almost believed that there would be chaos in the streets and bread lines would circle the blocks. I really just had a hard time wrapping my head around that, despite they’re reasoning. Now we know their reasoning was fraud.

When the market starts to go down, it is very important to understand the reason for that downward turn. During July and August, I spent an inordinate amount of time researching economic trends to see if I could understand the dire nature of the financial headlines. I knew for a fact that interest rates were low and would continue to be low for years to come. I also knew that earnings were good, and if not for energy would be even better. But the most important thing I knew for a fact was the U.S. economy was stable and certainly not ready to spin into a recession. Based upon that analysis, as I predicted at the beginning of last month, the most likely course of action would be for the markets to move up rather than down. I think it is fairly clear that October was nothing short of spectacular from a stock market standpoint, and therefore we were right.



I want to take a minute to include a picture of one of my partners so you could get to know more about him, as he plays a very important role here. The above picture is of Eddie Wilcox (who you’ve most likely spoken to at one time or another) and his wife Jennifer, along with their two girls Harper (age 6) and Lucy (age 4). Eddie and his family have a long history with our company. Jennifer was the first of the two to come work for my company. Her first day of work was actually the day that my son, Joshua, was born. Needless to say, she showed up for work that day and I was out for the birth. Since Josh is now approaching 21 years old, it is pretty easy to calculate how long she worked for my companies.

Eddie came a few years after Jennifer and also has double-digit longevity with the firm. Since joining the firm, he has obtained his CFA and CFP, which are very prestigious financial designations, and is a partner on the financial counseling side. Jennifer left a few years ago to pursue grander things (if that is possible), but we certainly wish her well.

Before I get into the information I want to share with you this month, I need to report the numbers for the month of October. For the month of October, the S&P 500 was up a sterling 8.4% and has a one year return of 5.2%. The NASDAQ composite was up even more at 9.4% with the one year total return of 10.4%. The Dow Jones industrial average was up 8.6% in October and up 4.1% for the one year period then ended. The Barclays Aggregate Bond index was flat with no gain in October and has a one year return of 1.9%. There is no question that October was an excellent month, moving up to a very high level.

Just how good was the month of October? Let me count the ways.

• The Dow had the largest monthly gain ever up 1,379 points in the month of October. While it certainly was not the largest percentage gain of any one month in history, it was the largest point movement in any one month, ever.
• The S&P 500 has only had 12 monthly gains greater than 8% going all the way back to 1987, almost 30 years ago.
• Microsoft was up 18.93% during the month - an excellent month.
• Amazon is up 22.27% for the month - an excellent month.
• Not only was the U.S. market strong, the German Dax turned in its best month since 2009 with a gain of 12.32%. The UK FTSE 100 also had an excellent month, and its best month since 2013, with a gain of 4.94%.
• The much-maligned China Shanghai composite index returned its best month in over a year with a gain of 10.8% during the month of October.
• Japan’s Nikkei also turned in an excellent gain of 9.75%.

Therefore, it was not only a great month in the U.S., it was a great month in financial markets across the world. I often wonder just exactly what investors are feeling when we have downturns like July and August. Interestingly, we had very few calls during this downturn, mainly because I think most of our clients have been around long enough to realize these downturns would be short and the turnaround would be swift. Fortunately in this case, that was exactly what happened.


Joe and Dakota - 18th Hole at Pebble Beach


Halloween 2015

I also want to cover a couple of economic issues that may be important. The 2015 third quarter GDP preliminary announcement was for a gain of 1.5%. This number came in somewhat less than projected, and quite frankly, I believe it to be incorrect. If you look at the internals of the GDP, you will see that consumer spending and other consumer related components of the GDP were very strong. What was not strong was the fact that inventories were drawn down at a significant level, therefore creating a major drag to the GDP calculation.

It must be understood that there is no way the government could have an adequate read on inventories only 30 days after the end of the quarter. This number is basically a guess and may or may not be revised as we go forward. However, it is most unusual that inventories would suffer that major of a decline going into a strong business cycle. It is my opinion that once GDP is revised in the coming months, that number will go up significantly.

There is no question that over the last few months, manufacturing has declined in the U.S. This could be directly attributable to the strong dollar, and therefore the drag on the ability of U.S. manufacturers to export to foreign markets. It has gone down only a few percentage points from full capacity.

The employment numbers and the consumer strength maintain its strong upward trend. Although the economy continues to drift in the 2% GDP range, it clearly is not headed toward recession. While I do not anticipate a huge GDP movement to the upside, I certainly do not forecast one to the downside. My guess is that for the rest of 2015 and 2016 we will see an economy that basically averages 2.5%, with some quarters being good and some quarters not so good. I guess you would call it a Goldilocks economy – not too strong, not too weak.

As we move into what are historically the best months of the year for investors, I expect to see volatility continue to drive the markets. We are seeing big moves to either the upside or downside on an almost daily basis. This has very little to do with economics or valuations of stocks – mainly traders trying to recover from a period of time when they clearly were not on top of the investment world. As I have often mentioned, just stay invested in top quality companies. Short-term trading is a science that no one has ever been able to fully master. Peter Lynch often points out that there is not a single trader of stocks on the list of the wealthiest people in America – maybe that should tell you something.

For the rest of 2015, I predict that volatility will reign but the market will drift higher. And with a strong December anticipated, the total return of the market might even meet the projections I made in January 2015.

I know there are many people reading this blog who are sitting on tons of cash, earning exactly zero. I also know that many clients should have already made their IRA contributions for 2015, but have not (you know who you are). It always amazes me that when a store has a sale on its merchandise, people line up to take advantage of it, yet when the stock market was “on sale” in July and August, people didn’t even want to consider investing.

In summary, my predictions for October worked out very nicely. I also predict that investing in stocks at the current time is the absolute best way to plan for your retirement. Sitting in cash, earning zero, is a false science and will almost assuredly leave you short when retirement comes.

Now is also a great time to come and visit with us and discuss your financial plans. We would certainly welcome seeing you and getting updated on your life, and making sure you are on track to meet your goals.

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

Best Regards,
Rollins Financial, Inc.

Monday, October 5, 2015

90% chance of being profitable - I will take those odds every time.

From the Desk of Joe Rollins

I will bet that if you were given the odds of making money, 90% of the time you would take that bet. Just think of that possibility. You would have the odds of making money nine out of every 10 times you placed a bet. Who could really ask for better odds?

I use that analogy to reflect on the fact that the stock market, as measured by the S&P 500, has been profitable in nine of the last 10 years. The only loss year was in 2008 when it lost 37%. Yet, every day I hear clients say that they are scared of the market because of 2008, not realizing how many years the market has been profitable. In fact, if you go all the way back to 2003 the market has only been down one time in the previous 12 years. It always amazes me how poorly informed investors are when it comes to these facts. If given the odds that you will only lose money one out of 12 times, virtually every investor (even a conservative one) would take that bet.

Just for the sake of argument, I started asking clients how many times they thought the market was up over the last decade. I got answers from two to three, and the highest one I received was six; yet, the market was up nine times in the last 10 years, but virtually no one knows it.

Before I go on my rant about why stock prices should be going up at the current time, I do have to report on the month of September, which was negative all around. For the nine months ended September 30, 2015, the S&P 500 is down 5.3% for the year and down 0.6% for the one year period ended September 30, 2015. The NASDAQ composite is down 1.6% for the 2015 year but is up 4% for the one year period then ended. The Dow Jones industrial average is down 6.9% for the 2015 year and down 2% for the nine months then ended. The Barclays aggregate bond index is up 1% for the 2015 year and is up 2.8% for the 12 month period. There is no question that the months of August and September have been very negative. For the two month period the S&P is down 8.7%, but it seems a lot worse than that, given the volatility on the market.

For those of you who have not heard, Danielle and Robby (both of Rollins & Van Lear/Rollins Financial, Inc.) welcomed their precious baby boy into this world on Monday, September 28, 2015. Everyone, say hello to Patrick "Reid" Schultz!

Caroline, Robby, Danielle and Reid

For this blog I decided I would focus on why the market should be up, in contrast to all the pessimism reported in the financial press. Some of the reasons are as follows, with some more important than others:

• The market is not overvalued at the current time. Numerous publications have put the estimated S&P earnings for 2016 at $130. Dividing that by the current valuation of the S&P at 1,920 the multiple to earnings is below 15. Historically, the market trades at a multiple of 17 to 18 times forward earnings; therefore at the current time the market is valued at less than historic valuations.

• As an investor, the best time to invest is when the market is down and the trading choppy. Baron Rothschild, an 18th century British nobleman, is quoted as saying “The time to buy is when there’s blood in the streets.”

• Warren Buffet, the most successful investor of the 20th Century, only had one word to say regarding the market selloff of August and September, “Buy.”

• People are not giving enough credit to the reduction in the price of oil and the reduction in the pricing of commodities. Given that the price of oil is down roughly 50% over the last year, virtually every segment of the market should enjoy higher earnings based upon lower energy costs. While it certainly does not benefit the oil companies, virtually all other sectors and the consumer will benefit by having these lower energy prices in their budget.

• The level of pessimism by investors is virtually unprecedented since 2008. There seems to be such an overwhelming feeling of despair by investors that it would seem to reflect capitulation and therefore a contrarian reason to buy. Rarely are market bottoms reached with a level of high investor optimism, but often they are met on the contrary, by high investor pessimism.

• Alternative investments to stocks are not attractive. Currently, cash is paying close to zero and real estate is not getting normal appreciation since there is a lack of inflation. Precious metals have been in a downward trend for years and bonds do not offer the protection of a loss of principal, given that we are anticipating interest rates are going up. Therefore, at the current valuations, we believe stocks are the best investment to protect you against inflation since none of the other investments offer a realistic opportunity to go up in value over the next 12 months.

• The market, as measured by the S&P 500, historically goes up in value roughly 8 years out of 10. Contrary to popular opinion, the S&P 500 has been up 9 out of 10 years from 2005-2014. The only year that the market was down in the last 10 was in 2008, when it lost 37%. Given the historic average of the market being up in 8 out of 10 years, the fact that we have had 9 out of 10 profitable years, a pullback is not unexpected.

• The U.S. economy continues to be strong. Just this week it was announced that the second quarter GDP in the United States at 3.9%, which is very strong. In addition, there are 2.3 million Americans working at the current time that were not working this time last year. Unemployment is at 5.1%, which is near the historic level of 5% that economists use as a gauge for full employment.

• The housing industry in the United States has recovered nicely but is still not at 2007 levels. Housing construction is up in all regions of the United States and consumer confidence index is now near the 100 level in the United States.

• Much has been said about the potential of an earnings decline in the third quarter of 2015, but that is only due to the dismal earnings from the energy companies of the S&P 500. If you did not include energy companies, the S&P earnings would set a new all-time record in the third quarter of 2015. Even if you factored in that decline for energy companies, the decline in earnings would only be a few percentage points off of the all-time high ever earned by corporate America.

• Much has been said about the slowdown in China, but in fact, the slowdown in China is relatively minor. Last year, GDP was measured in China at roughly 7%. Very few are forecasting a GDP in China of less than 6% for 2015. While there certainly has been a decline in the growth in China, they are still experiencing one of the highest growth rates in the world. And more importantly, exports to China represent less than 1% of U.S. GDP.

• Bear markets tend to occur when the United States falls into recession, such as in 2008. As mentioned above, the GDP was recently announced at 3.9%. It appears that for all of 2015, the GDP may actually exceed 3%. There are very few forecasting a recession in the United States for at least several years into the future. The likelihood of a bear market in an economy growing at 3% would be virtually unprecedented.

• The wild fluctuations in the market have a lot to do with the ease of trading ETFs, which in many cases are leveraged multiple times to their underlying value to the stocks. Given that the indexes can be easily traded with one ETF, there are large fluctuations in value based upon traders’ manipulation of these popular investment vehicles. By virtue of trading an ETF in a specific sector, all stocks of that sector are traded either up or down. Unfortunately, individual stocks are not isolated for trading, but rather the entire sector is traded. This creates high volatility by traders who use leverage to obtain a movement in the market with a minimal amount of capital. Momentum traders work either up or down until the trend is broken. In recent months, since the trend has been down, momentum players have exaggerated the movement by trading leveraged ETFs of the major market indexes. In prior years, these trading vehicles were not available to the average investor.

• Car sales have picked up nicely and are projected to finish up 2015 with 18 million unit sales this year. You may recall during the height of the financial crisis when car sales in the United States fell to only 12 million. The significance of this pickup in car sales is that hundreds of thousands of people work in the car industry. While certainly many are employed by the car companies themselves, the majority are employed in the companies that provide parts and services to the car industry. The manufacturing of cars in the United States is a huge contributor to positive employment, and the fact that car sales are moving toward all-time records is extraordinarily important for both employees and the companies that represent the car industry. Also, cars are a true reflection of consumer confidence. If the consumers did not feel confident, they certainly would not be purchasing new cars and agreeing to finance over the long-term for their automobile purchase.

• Personal income in the United States has been growing at 4% or better annually since March of last year. When personal income is growing, there is an expansion of spending on housing, automobiles and other luxury items. Since roughly 70% of the U.S. GDP is dependent upon consumer confidence and consumer spending, that bodes well for the future economy. As long as the consumer stays healthy, so should the U.S. economy. With full-employment almost reached in the United States and the consumer sentiment index near 100, it would not appear that GDP is in danger over the short-term.

Quite frankly, I have no idea where the market is going next week or the week after, or nine months from now. However, I know with absolute certainty that the market will be higher five years from now, 10 years from now and 20 years from now. It has always baffled me why people are so concerned about what happens on the market on a day-to-day basis. It really has little impact in the long-term horizon of investing. Traders must make money, and in order to make money, they must move the market. That is the difference between traders and investors. We, as investors, should not even consider the wild fluctuations and high volatility you see on the markets these days.

In this business we like to say that, “you have to look through the clouds in order to see the sun”. I do not invest based upon public sentiment. I invest based upon facts. The facts above clearly illustrate that there is a high likelihood you are going to make money being invested, and we absolutely know you will not make any if you are not invested.

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

Best Regards,
Rollins Financial, Inc.

Thursday, October 1, 2015

Introducing Patrick "Reid" Schultz

Cute AND an additional tax exemption...

We are pleased to announce that Danielle & Robby welcomed their second child, a beautiful baby boy, into this world at 3:55 p.m. on Monday, September 28, 2015. Patrick "Reid" came in at a healthy 7lbs, 10oz., measuring 20.2" long.  Their adorable daughter, Caroline, is still trying to comprehend why this new loud toy is okay, but her Tickle Me Elmo doll has been banished to a shelf out of her reach...  


Congratulations, Danielle and Robby, he's perfect!  Cheers to another job well done!

Wednesday, September 9, 2015

Celebrate Full-Employment, but Separate the Facts from Fiction.

From the Desk of Joe Rollins

There is just no way to classify the month of August as anything but a real bummer. There is just about no way you can characterize it other than what it really was – a long awaited correction in the equity markets. At one point during August, the S&P 500 Index suffered a decline of 11.1%. Anything greater than a 10% correction is considered to be a very normal process in equity investing. Over time, typically these types of corrections occur about every 18 months. While it has been quite unusual, we have not suffered a correction in the U.S. since 2011, and therefore we have enjoyed basically a four-year period when no corrections occurred.

In this posting, I want to try to clarify some issues that seem to be confusing investors. First off, this type of correction is quite common in investing, even though that does not make it feel any better. I also want to remind readers of the long-term positive markets we have enjoyed since the debacle in 2008. Almost every day I am told by a reader that they have not forgotten the loss in 2008, and therefore they fear investing today (7 years later). Let us quickly review the gains that we have enjoyed since that time:



It is been a great run as a rebound from the 2008 loss of 37%. It still amazes me that so many investors quote the stock market of 2008 as the reason they had been uninvested completely since that time. As you can tell from above, the 2008 gains were quickly recovered, and the equity markets have gone on to much larger gains.

It is important to review the August numbers so that you have an understanding of how equity markets work. There appears to be absolutely no chance of recession in the United States any time soon, so the fear of a long-term bear market is just not in the cards. I want to cover some of these points in detail so that you can understand the real facts as compared to the fiction you hear in the financial news of the fear of an upcoming recession. However, unfortunately I have to cover the bad news first.

The Standard & Poor’s 500 Index suffered a decline of 6% during the month of August and is down 2.9% for the year. The NASDAQ Composite was down 6.8% for the month of August, but continues to be up 1.6% for the year. The Dow Jones Industrial Average was down 6.3% for the month of August and is down 5.8% year to date. Even the Barclays Aggregate Bond Index was down for the month at 0.3%, and for the year is up 0.3% or essentially breakeven.

I thought you might enjoy some “First Day of School” pictures of Ava.


Age 2

Age 3

Age 4

While all these numbers are significantly lower, in no way should you be hesitant to continue to invest. As mentioned in the headline, the unemployment report for August pointed out that the unemployment in the United States is now 5.1%. When I was in college learning basic economics, we were taught that the full employment level for the economy was 5%. We will almost assuredly reach that level in the coming months.

Even though the number of newly employed in August was low, that number is extraordinarily misunderstood. First off, what employer is going to hire new employees during the vacation month of August? Historically, it is a weak month, and due to seasonal adjustments, is not reliable as to the actual number of new employees. Going into a seasonally strong season for consumer spending, you may rest assured that the 5% unemployment level will be reached shortly.

With GDP growth revised up to 3.7% in the second quarter of 2015, almost assuredly the third quarter will be in the 3% range. The U.S. economy appears to be very strong with consumer spending up, housing starts accelerating and more people working than in many years. Why would we suffer through a market decline of 10%?

I argue that much of the decline in the equity markets relates to investors just not understanding everything they hear on the news. Maybe it is the old axiom you should read less and study more. As an example, I had one client give me all the reasons why the equity markets would go down, including worldwide debt, ISIS in the Middle East, Civil War in Syria and a long list of other macroeconomic concerns. When I asked her which of those concerns would be paramount in the next three or four years, she was readily agreeable that likely none would be. We invest for periods of time over months, quarters, and even years. However, if you invest for the ultimate end of the world as we know it, likely you would be making significant long-term investment mistakes.

Also, the data is sometimes extraordinarily misleading. I quoted in the last posting regarding the wild fluctuations in the price of oil. Even though the reduction in the price of oil is extraordinarily positive for most all consumers, a good deal of the investment world makes the assumption that the reduction of the price of oil is a negative financially because it reflects lower economic activity, and therefore an upcoming recession. Do not believe everything you read in the paper!

One of the things we always need to be concerned about is whether financial engineering is not affecting things that, in the past, we presumed to be market forces. Clearly, the price of oil is affected by supply. There is no question that the supply of oil in the United States is high, but inevitably, it is coming down dramatically. As an example, a year ago, there were 1,584 rigs drilling for oil in the United States. Today, there are only 864 working rigs. That means that over the last year, 720 rigs have been idle, almost 50% of the working rigs.

One of the interesting aspects of oil that has been drilled with a fracking technique is that those oil wells do not run long-term, and usually burn out within 7-10 years. The fact that we are not seeking new sources of oil indicate that soon the supply of oil will clearly be diminished and the price of oil will have to go up to adjust to the decreasing supply. Remember that the U.S. exports NO oil overseas. Therefore, oil production in the United States is clearly a U.S. only phenomenon, and this production is going to come down.

Why do we have the wild fluctuations in oil? At the end of August, crude oil prices jumped 10% on Thursday, August 27 and then another 5% on Friday, August 28. However, come Monday, August 31 the price jumped 8%, but lost 8% on Tuesday, September 1. If you look at those wild fluctuations of the price of oil, it is an unprecedented volatility. Energy market journalist John Kim calculates that a standard deviation jump of that size should happen just once in every 600 years. In fact, it happened in only five days of trading. This is not a natural reaction to basic supply and demand of energy.

What we are seeing is a wild fluctuation in financial contracts that are impacting the price of oil. These financial contracts are essentially betting on the price going up or going down. It has nothing to do whatsoever with the potential economic impact of a particular economy. Even though the price has stabilized, it would not surprise me to see it go back up or down, based upon the bets of these financial contracts. However, do not read into the price of oil upcoming economic chaos without understanding the huge economic benefits to the average consumer these lower prices project. Do not confuse financial engineering with true supply/demand concerns.

Also, much of this manipulation of equity markets was self-evident when one day the Dow Jones Industrial Average opened down 1,000 points in August. While certainly a scary day, you have to realize that a good deal of this decline was activated by stop-loss orders being executed automatically when certain points were reached in the downward market. Many investors try to protect their investments by basically stopping out the price when there is a dramatic movement. In most cases that leads to a stop-loss at very low prices and does nothing for long-term investing.

When you get a major move to the downside, so many of the automated systems sell out of the equities without any thought as to why the loss even occurred. If you are a long-term investor, like we are, that is a true negative since it stops you out of a position that may quickly rebound in the afternoon or later in the week. I am not trying to state that all selling is due to automated systems. I do want to emphasize though that these exaggerated moves are not done by long-term investors, but rather short-term speculators that try to time the market.

Here is another example of financial manipulation that you should ignore when investing. I had this real bad habit of staying up late and watching the Asian stock markets trade. I really should get more sleep. I normally setup to watch Bloomberg TV which has all the real time quotes from the Asian markets and watch the effect of the U.S. futures on my iPad. One day during August, the Chinese stock market opened down 4% and there was an immediate effect on U.S. futures. U.S. Dow futures went from positive 100 to negative 100 in a nanosecond.

With such a violent move in the futures, I knew at that point there must be some gigantic contract reflected in the futures. I quickly scanned the volume of U.S. futures on my iPad and noticed that the only change had been a contract sold for 1,000 units. It is hard to believe that one guy standing in a dark basement somewhere in the world sold 1,000 contracts against the U.S. market and literally wiped out $1 trillion of wealth. I am often confronted by clients that quote the futures and the effects they would have on the markets. As illustrated, if you believe everything you saw in the futures market, inevitably it will lead to a conclusion not based on facts.

Even though we can explain high volatility during the month of August, the most important point is what do we believe the equity markets will do for the rest of the year? There is almost no question that by using a normal valuation basis stocks will price to move up significantly before the end of the year. The biggest contributor to higher prices today is that there are virtually no alternatives for investing currently. It is not likely that the short-term investors dumped stocks to go to cash earning zero or bonds, which clearly will suffer headwinds and likely will lose money as we get closer to the end of the year. Therefore, in order to evaluate where we stand today, it is important to understand how the stock market is priced today.

The S&P 500 Index now trades at 14 times 2016 consensus earnings. This is an attractive valuation given that over the long history of investing that average has been above 15 times. The S&P 500 dividend yield is now 2.24%, which is higher than a 10-year treasury bond currently earns. One of the technical ways to evaluate whether you are better in stocks or bonds is called the “earnings yield gap”. Basically, it is the inverse of the price-earnings ratio mentioned above of 14.8. If you divide 100 by the price-earnings ratio, you get a yield of approximately 6%. If you then compare that with the treasury yield of approximately 2.19%, you see that the spread differential is an almost full four points greater. What that means is that you are three times better off investing in equities than bonds at the current time. By point of reference, this is the highest ratio in the last 20 years, illustrating a more superior value in stocks than in bonds.

It is never fun or easy to sit back and watch the markets go down. However, after a lifetime investing, it is more important to understand where you are going, rather than where you have been. We have enjoyed seven great years of investing since 2008. Bear markets only come with a recession in sight, and there is no empirical evidence that the U.S. is facing a recession of any kind. While people like to comment on recessions outside of the United States, such as China, Europe, etc., each of those countries/regions have no signs of the upcoming recession either. In fact, China is well above the recession level even with their reduced activity, and Europe has broken out to positive GDP growth and they continue to stimulate their economy.

If any of you think that I have been shaken by the downturn in the market during the month of August, you would be mistaken. In fact, I have developed a higher level of confidence because the economy has strengthened, employment is greater and consumer spending and housing construction is on a much higher trajectory now than at the beginning of the year. As we go into the yearend with Christmas spending, I think that these worries regarding oil, China and any number of other numerous concerns you may quote will be reduced. It is amazing to me that people look for reasons to sell with no viable alternative for investing. To me, the fear is misplaced unless you have knowledge that would indicate otherwise. Once again, I highly recommend that you think before you sell, rather than sell before you think.

I continue to hold my position that the markets would be up roughly 10% in 2015, and therefore we would move from a position of roughly down 5% in early September to a total gain of 10% for the year 2015, and therefore an upcoming rally of more than 15%. There is no question that events may lead to another conclusion, but from valuations, earnings, and the economy, I think the 10% gain is more likely than not.


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

Best Regards,
Rollins Financial, Inc.

Friday, September 4, 2015

Labor Day 2015

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 7th. Please note that all major U.S. stock exchanges and banks will also be closed due to the Labor Day holiday.


If you require immediate assistance on Monday, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com. Our office will re-open for business on Tuesday, September 8th at 8:30 a.m.

Be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Monday, August 24, 2015

“Do not try to buy at the bottom and sell at the top. It cannot be done - except by liars.” -The great speculator, Bernard Baruch

From the Desk of Joe Rollins

Anytime you have a stock market like we had last week, you start to question yourself. The S&P unexpectedly lost 5.7% and is now down 3.1% for the year through Friday, August 21st. Most of the damage was done on only two trading days, Thursday and Friday, when the markets fell roughly 5%. At the current time, the Dow Jones Industrial Average now sits in correction territory having lost 10% from its all-time high. While the S&P and the NASDAQ are just shy of a 10% correction, it seems a lot worse since the losses all occurred in one calendar week.

It is very important when the market sells off like this to evaluate why the market was so volatile on the downside, and maybe what course of action you should do in the future from the upside. There is no question we are closely evaluating the daily volatility and reevaluating what steps we should make. However, this particular selloff seems to defy most any type of logic, and certainly the economic numbers do not support it. I thought I would give you a mid-month update and just see whether you agree if the numbers are realistic or not.

It is important to understand that a 10% correction in the market is not particularly unusual. As we often quote in these postings, you can expect a 10% movement in the market virtually at any time. It has been unusually calm for the last four years and we really have not had a movement that large. We came very close in October 2014, when the S&P bounced up against the 10%, but did not close below that level. Even though we are not at that level yet, for anyone to assume that a movement such as this is rare or unusual is just misinformed. Markets move sometimes for no particular reason. However, it looks like the reason for this movement centers principally on the Chinese economy, and certainly not based upon U.S. economics.

Stock markets tend to fall into major down cycles when the economy is moving towards a recession. There certainly is no evidence that any recession in the United States is anywhere close. The second read on the GDP for the second quarter was at 2.3%. It is generally believed that the final read on the GDP will increase the GDP in the second quarter to above 3%. The current projection for the third quarter GDP also is greater than 3%. Clearly, there is no reason to assume the U.S. economy is anywhere close to falling into a recession.

Contrary to the tragedy in the European markets last week, the European economy continues to improve. Manufacturing in Europe is better and improving. While Japan is certainly not gangbusters, it is also certainly not currently in a recession. While the slowdown in China is troublesome, their last read on the GDP was 7% and there are few who believe it will fall into a recession anytime soon. It must be remembered that the Chinese government has strong control over their economy, and they have shown a desire and willingness to support the economy and hold a higher level of growth. I would fully expect that they will continue to do so this time if a true slowdown occurs.

While I guess what is particularly baffling to me is that when China devalued their currency two weeks ago its sole purpose was to stimulate exports, which is very good for the U.S. economy. Basically that means the goods we buy from China will be cheaper in the future. We actually export very little into China. It is believed that exports to China amount to less than 1% of the GDP for the United States, UK, France, Italy and Spain; Germany exports 2.6% to China; and 2.7% for Japan. None of these numbers are extraordinarily high, and certainly the Chinese economy is not going to zero. Assuming that there is a decline of 25% in exports to China, the effect on the GDP in the United States would only be one quarter of 1% - almost insignificant.

Interestingly, economic numbers of the United States were particularly robust with residential existing house sales expanding at one of the fastest rate ever to its pre-2007 level. New housing starts are up over 10% for the year-over-year numbers and nonresidential spending is up a robust 15%. The unemployment rate is 5.3% and the number of unemployed has fallen 15% year-over-year. Yes, if you are confused by the very upbeat economic news in the United States and the stock market performance that lost over 5% in one week, you would not be the only one.

To even further confuse the issue, large U.S. bank stocks fell close to 10% last week in trading. That is very difficult to reconcile given the strong economic numbers - and clearly they have zero exposure to China. Yes, you could understand the decline in oil related stocks, but now with Royal Dutch Shell and BP yielding 7% on their dividends, you would have to think even that is overblown. So we have to sit back and decide whether there is economic support for continuing to invest in the stock market or moving aside.

At the current time, the Standard & Poor’s index of 500 stocks is selling at a reasonable 16.7 times earnings for 2015. The current dividend yield is 2.2%, which is higher than the 10-year Treasury bond. Therefore stocks, even in this broad-based index, would appear to be a much better investment than bonds.

The numbers are even more pronounced in the Dow Jones Industrial Average, which sells at a 15.9 times earnings and has a dividend yield of 2.6%. The Euro Stoxx 50, which is the 50 largest companies within the Euro countries, is selling at an extraordinarily low 13.9 times earnings with a 3.8% dividend yield. Even the extraordinarily beat up Shanghai composite is valued at a modest 14.4 times earnings with a 1.8% dividend yield.

There was a lot of commentary this week about the decline in Apple stock. Interestingly, this company fell 6% on Friday alone. It was argued that investors were concerned about Apple selling iPhones into China. While it is true that China is its second-largest market after the United States, what was not pointed out was that Apple buys virtually every iPhone they sell from China, which would be cheaper with their currency devalued. Just on a financial ratio basis alone, Apple sells at 9 times earnings if you reduce its value by its $150 billion in cash. There has hardly been a company that grows at a 30% annual basis net of its cash sell for such a low multiple.

I have closely reviewed all the data and information from the weekend press. At the current time, I see no change warranted in our long-term investment philosophy. Market movements such as this are not rare or terribly unusual. However, we will continue to evaluate the situation and see if by chance we have misread the economic data or we clearly do not comprehend its importance, although I see nothing at the current time to warrant any type of prolonged selloff.

It seems to me that a good deal of this selloff has to do with financial engineering and not economics. Since there is clearly not an economic event, it must be something other than the economy. In 2007 and 2008, there was clearly an economic event. People seem to forget that the GDP in 2008 a negative 6.5%. We are anticipating a positive 3% GDP growth at the current time, so clearly that is not the cause.


Sometimes you wake up with a conspiracy theory that all the market momentum people crowded into the same trade. Oil is a good example of that phenomenon. Currently, oil is selling at less than $40 a barrel, even though that is less than the cost to extract it from the ground. This is in spite of massive cutbacks on the number of rigs drilling oil and the budgets to exploit that oil. Nothing at this point indicates that the price of oil should be in the $30’s per barrel, yet that is where it is trading at today. You may rest assured that the oil companies would not agree that $30 is a fair price.

I guess we will not know whether this is financial engineering until the market turns around. If, as I suspect, everyone is short to market you will see a massive short-cover rally soon, and the market will go up as quickly as it went down. Both of these are financial and not economic, and the move up would be equally as meaningless as the move down has been.

While the markets may not jump back this week, the markets will definitely do so at some point soon since it clearly cannot be a long-term down market when economic statistics continue to be extraordinarily robust and positive as they are now.


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

Best Regards,
Rollins Financial, Inc.

Tuesday, August 11, 2015

Why Are You In Such A Bad Mood?

From the Desk of Joe Rollins

I am a little overwhelmed by the high degree of skepticism that you read today in the financial markets. When I logged onto Yahoo the other morning and read the endless list of meaningless reports on various things from entertainment to the economy, I could not believe that six of the lead articles proclaimed that the stock market was ready for a huge tumble. They gave all kinds of different examples of why the market would fall, but principally the only reason the editorials could give is the fact that the market has been up for six straight years. They did not quote any economics, nor did they give us any additional news on which to base an educated opinion, it was just a gut feeling that the editors wanted to express.

I see the same sort of skepticism among a few of my clients. Almost every day, I receive some sort of comment about, “Do I think the market is overvalued at the current time?” I think my blogs for the last six years have expressed my opinion and evaluation; certainly, this month they are no different.

In preparing for this posting, I went back and reviewed my blog from July titled “Greek Tragedy 2015, Again?”. I am amazed that the issues that I previously discussed have come and gone. At that time, we were all concerned about the implosion of Greece. Here we are one month later, and there is really no change. Greece has done virtually nothing to solve its economic problems except increase taxes. Of course increasing taxes slows the economy, which will put them into another recession, meaning they will not be able to pay bills in the future. Absolutely nothing has changed, yet one month later, you rarely hear anything about Greece.

Certainly, we have the issue of The Iran Accord, but honestly any accord we have with Iran will be ignored and their ability to flood the world with new oil resources is almost illusionary. Iran does not have the capital to exploit oil without the help of the West. Now realistically, who believes a country in the West would invest money in Iran, given their political ideology against the United States. While certainly Russia would invest money to exploit Iranian assets, they would only do so if oil were anywhere close to a reasonable price. Since Russia borders on bankruptcy itself, it is not likely even they will get involved. While the world is so fixated on Iran flooding the oil markets, this is based solely on a world of misinformation.

I discussed in early July that the stock markets were actually very stable, and would likely continue to trend upward. Amazingly, at the time I wrote that article the market was down significantly due to the situation in Greece. However, as I correctly predicted the market was up nicely during the month of July, even in the face of huge headwinds.



A 30-year client turns 95!



My staff celebrating with the birthday girl.


The Standard & Poor’s index of 500 stocks was up 2.1% for the month of July and continues to be up 11.2% for the one-year period ended July 31, 2015. The NASDAQ composite was up 2.9% for July and is up 18.7% for the one-year period there ended. The Dow Jones industrial average was up 0.5% for the month of July and is up 9.3% for the one-year period there ended. In contrast, the Barclays aggregate bond index was up 0.9% for the month of July and is up a less than sterling 2.9% for the one-year period ended July 31, 2015.

Virtually every week we speak with an investor that sold out of the market for 2008 and as of this date has not reinvested. It is not that they invested in bonds when they sold out; they have just been sitting in cash for close to seven years. That would not be a bad deal if cash were earning anything, but as we all know, cash is earning virtually zero.

I just wanted to give you one illustration of how flawed trying to time the stock market is based upon numbers as we see today. We all know that the S&P 500 index was down 37% in 2008. We also know the market rebounded after that point to have six excellent investment years. In fact, the S&P 500 index has averaged 7.7% for the last 10 years, which includes 2008! If the average investor had done nothing during 2008, they still would have had averaged 7.7% in the intervening 10 years – how could you incur such a huge loss in one year but yet average a rate greater than 3.5 times the rate of inflation? It seems that most investors only show any interest in the markets when it is down and tend to ignore it when it is up. Over the last 10 years, we have had substantially more up markets than down markets.

In comparison, the Barclays Aggregate Bond Index, which is considered safe, has returned 4.3% over the same 10-year time period. So if you had been invested in stocks, even with the huge downdraft, you still would have made 7.7%, but conversely if you had been invested in so-called safe investments, such as bonds, you would have returned 4.3%. If you compare these numbers and can make any rational evaluation, you would see that investing in stocks has been more profitable than investing in bonds, even during this time of high volatility.

Returning to my rant on investor pessimism, I am encouraged that investor sentiment is so bad. As an example, the AAII Investor Sentiment Survey reached a low of 26%, which is extreme given that the long-term average is 39%. That level has only been seen twice since 1995 - early 2003 and early 2009. Both of those time periods were followed with very significant gains in the market. In addition, there is a high level of pessimism among investors, since Merrill Lynch now reports that 5.5% of all of their portfolios of asset managers are in cash. That is a significantly high percentage placed in an asset that earns virtually zero. You see ultimate pessimism everywhere around you, yet no one gives you a specific reason why they are so negative. Maybe I can give you some reasons to be optimistic.

Recently, we received the first estimate on GDP growth for the second quarter, which is at 2.3%. In addition, they revised the first quarter from a negative number to a positive 0.6%. While certainly neither number is a barn-burner on its own, it is clear the trend is positive not negative. I do not expect to see a runaway increase in GDP for the next few years, but how anyone could interpret these numbers as being recessionary is just trying to stir the pot.

Okay, let us assume you are the ultimate cynic and you really do not believe economic data or anything else that the government publishes. You are so negative that the assumption by you is that the entire world is lying about the economy and how could it be good given all the bad you see around you. I certainly encourage your curiosity; however, it is very clear you are not familiar with your surroundings.

You do not need to be an economist to count the construction cranes as you drive down Peachtree Road in Atlanta. Also, have you ever considered that all of the apartments being built in Atlanta are being built for a reason? Companies would not be building huge apartment complexes if people were not moving here to take jobs. If you think your eyes are lying to you, just try to find a contractor to do anything today. I am pretty much like the old Murphy Brown television series in that I have had the same painter for well over 20 years. There are many who probably think Reggie lives with me, while in reality I actually pay him for his presence. The other day I asked him why it has been so difficult to find a contractor in the last six months. In Reggie’s famous way, he explained everything you need to know about the economy by saying, “Mr. Joe, there is a damn lot of work out there right now.”

The economic numbers are also supported by the government’s statistics. There are 2.4 million additional employed workers in the United States for the one-year period ended July 31st. That is a huge number of people creating commerce. Each person creates their own GDP, along with creating additional jobs for people that work in the companies in which they shop. It creates a better livelihood for them and their families, and therefore a stronger economy. Do you really want to know about construction contracts, which are now up 11% year-over-year? And do you think the housing is about to start back? New housing starts are up 26% year-over-year and house permits are up 30% year-over-year. Everywhere you look, houses in my part of town are being torn down to build newer, bigger and nicer homes. There is absolutely, unequivocally no question, the economy is on the upswing and anyone who tells you otherwise is doing so to mislead you.

Along with everyone else, I project that the Federal Reserve will increase interest rates a quarter of a point in September. Really, how much time are we going to spend in discussing interest rates going from 0 to 0.25%? The rates are still at historic lows, and this minor adjustment affects virtually no one in the economy. Please do not even spend a minute thinking about this scenario when it comes to investing. While certainly the economy affects stock prices, it really only does so when the economy is negative. There is certainly no evidence to indicate a negative economy anywhere around.

One of the new worries that seem to be impacting the investment community is the gigantic selloff in commodities, including oil. There seems to be a misconceived correlation between the price of oil going down and a suffering economy. There is no empirical evidence to support that assumption; however, a lot of momentum traders do not need a reason, they just trade and think later.

For the last several months, I have studied the oil market in detail. I am of the impression today that the price of oil is impacted less by normal supply and demand, and more by institutional buyers dealing in hedges, futures and short-selling. The selloff in energy stocks is borderline ridiculous. When you have Chevron yielding 5%, Royal Dutch Shell 6.4%, and BP 6.7% as compared with the S&P 500 yield of 2%, you can see the selling has been exaggerated. In addition, we are seeing a selloff not only of crude oil, but also copper, gold, and virtually anything else commodity-based.

One of the questions I receive on a weekly basis is why we do not invest in gold. As mentioned here often, I cannot evaluate gold since it has no yield, is not scarce, and it has absolutely no value in an inflationary economy. All of those are personal opinions, but the fact is that the ETF of GLD (Gold), which has assets of $23 billion, is down 42% from its 2011 peak. So yes, I am negative on gold and I have a right to be negative, given its terrible performance. Yet I still see many investors that have 100% of their assets in gold for reasons even they cannot explain.

One of the interesting evaluations today is that it is presumed by some investors that because the Chinese stock market is down significantly from its high, this must imply the Chinese economy is also sliding into a recession. How they make that correlation based upon any type of empirical evidence is a mystery to me. It is assumed that the average investor in China owns a large portion of his net worth in Chinese stocks. However, the Chinese research firm PCR Macro estimates that less than five percent of household savings in China are invested in the stock market – basically, blowing the theory that the economy is impacted by stock market performance.

In addition, the slowdown in their economy would have little or no effect on the U.S. economy. It is now assumed that if the U.S. exports to China fell to half, the effect would only be a 0.25% decrease in the U.S. GDP. Therefore, the assumption that the slowdown in the Chinese economy is reflected in the stock market or in an actual slowdown itself is completely false.

Based upon my analysis of oil and oil futures, there is a gigantic effect on price by the financial markets, not by supply and demand characteristics. While oil is certainly plentiful today, there is a shortage coming and that is clearly reflected in the cutting of exploration budgets by the large oil companies. Additionally, the oil rig count is down dramatically and therefore less oil is in our future. While certainly today the production levels are the same, you do not have to be a mathematical wizard to realize those numbers will drop off as oil rigs are idle and new exploration budgets are nonexistent. The most basic form of economic analysis is supply and demand. There is no question that supply constraints are coming; it is just a matter of whether it is three months, six months, or a year away. With the low price of oil, eventually that lack of supply will force it higher. Based on the numbers I continue to read, fair price on oil is roughly $70 per barrel at the current time. I would not be shocked or surprised to see oil return to that before the summer of 2016. And if that is the case, why do the commodity markets continue to sell off?

Once again, I refer to those traders that make their living pushing any point beyond its normal rational economic explanation. In this particular case, it has been a winning trade to sell short any commodity, any stock, or any asset that ultimately could be a commodity. Until those guys have exhausted the downward pressure on the market, you should not expect to see normalized commodity levels. Additionally, they will buy as quickly as they sold – and for no good reason.

As the second quarter earnings come to a close, it has been quite a satisfactory earning period. A lot of negative forecasters give a lot of credence to the fact that while earnings have been superior (except in the oil industry), revenues have been down. A major effect on reduced revenues is the strength of the dollar and the affect that foreign exchanges have on major multinational companies. Believe me, this is a temporary situation since the dollar cannot continue to accelerate against foreign currencies for much longer. At some point, when the dollar becomes anti-competitive for U.S. companies, then the effect of conversion to lower dollar will be the primary influence of the Federal Reserve. However, if you are taking into effect your lack of revenue based upon an occurrence that only happens in the short term, then you are not properly evaluating earnings going forward. I think that is the mistake many analysts are making, yet they need an excuse to downgrade stocks and this is a handy one.

In summary, there is really no change in my evaluation over the last 30 days. Earnings continue to be superior, both year over year and from quarter to quarter. If you excluded the major oil companies from the most recent quarter, it appears the earnings are 4% higher than they were this time last year, which were also record earnings. Therefore, the three criteria that contribute to higher stock prices all are positive. Interest rates are low and will continue to be low even when the Federal Reserve increases them in September. The economy is okay, not great, but there is certainly no recession in sight. Most importantly, earnings continue to be quite excellent and continue to grow. There is absolutely no economic or empirical evidence that anything should affect stock prices over the short term, and therefore no action is needed on our part.

With bonds almost assuredly to lose money over the next six months, stocks continue to be the superior asset class of choice. Yes, you are going to see high volatility, but just like July, we saw high volatility but the market was higher. I anticipate that volatility will reach extreme levels between now and October or November. There is a very practical reason why this volatility is so dramatic during the summer. With fewer people working, the traders can affect the market greatly since there is low volume. Only when professional traders come back to the market in the fall will some form of stability be reached.

I read these articles virtually every day that comment on a particular month being good or bad for the stock market. I am amazed that people read that with any type of credence. Do not tell me what the month of the calendar is; tell me what the economic circumstances are in that particular month. While August and September are historically bad months for the market, rarely have we seen interest rates this low, earnings this high, and a stable economy as strong as it is right now. Therefore, I expect volatility but the market should continue to struggle higher as we move toward the end of the year. Given that no other financial asset offers us that opportunity for economic gain, we continue to be invested in equities, both in the U.S., Europe, and Asia. And as always, we will adjust accordingly as circumstances dictate.


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

Best Regards,
Rollins Financial, Inc.

Tuesday, July 14, 2015

Greek Tragedy 2015, Again?

From the Desk of Joe Rollins

There are many things in life that baffle me, but the one thing that baffles me the most about the stock market is why people react the way they do. As an example, in the last several weeks, why on earth were people getting up in the morning and thinking they must sell Microsoft, Apple, GE and other industrial stocks after reading that the Greeks cannot pay their bills?

None of those companies do significant business in Greece itself, but yes, we must sell them to feel comfortable. It is not an unusual thing that Greece cannot pay its bills; it has not paid its bills for almost 2,000 years. Certainly, that is not new news, and certainly has no significant long-term effect on the U.S. market. However, traders that only work on a short-term basis and only take positions for a day, a week, an hour or even less, make their living this way. Trading has nothing whatsoever to do with investing, and everything to do with speculation. Before I write my rant on Greece, China, and other worldly events, I need to summarize the first six months of the year for you.

The first six months of the year would have been very satisfactory indeed, if it had not been for a 2% selloff in all the markets the day preceding the end of the quarter. Even with that dramatic selloff, markets performed admirably. The Standard & Poor’s index of 500 stocks was up 1.2% for the six-month period and has a very satisfactory yield of 7.4% for the one-year period ending June 30th 2015. Interestingly, the 10-year annualized return on the S&P 500 has been 7.9%, even with the huge losses that this index suffered in 2008.

The NASDAQ Composite has a year-to-date total return of 5.9% and a one-year return of 14.4%. The Dow Jones industrial average returned a miniscule 0.1% for the first six months of the year and has a one-year return of 7.3%. As forecasted and written in these blogs numerous times over the last few years, bonds continue to struggle. The Barclays aggregate bond index ended the first six months at -0.1% and has returned 1.7% for the one-year period ended June 30, 2015.

As I have pointed out in numerous posts, bonds are facing a headwind of unprecedented difficulty. It is hard to make money in bonds when interest rates rise, which causes the principal value of bonds to decrease. In our view, it is fairly clear that stocks offer an advantage for long-term investors who are looking to grow their portfolio going forward.

Before I continue, here are some recent pictures of Ava:

Enjoying the summer


Practicing writing her first and last name

The whole issue with Greece is really a tempest in a teapot. You have to understand the scope of the Greek economy to understand how insignificant it really is. The entire GDP of Greece is about the equivalent as the GDP of the greater Miami area. The combined gross domestic product of Miami, Fort Lauderdale and West Palm Beach, had a combined GDP of $281 billion in 2013. The estimate for the Greek economy over the same time period is $282.6 billion. While certainly it would be tragic if the GDP in Miami were to fall, it certainly would not be catastrophic for the U.S. economy as a whole.

Greece represents only 2% of the gross domestic product of the European economies. Europe in its entirety actually constitutes a larger share of the world economy than the U.S. The effect of Greece falling into recession, or even a depression, on the European economy would have the same economic effect if metropolitan Miami failed in the United States. The effect of an isolated Greek failure would have a negligible impact on the European economy as a whole, mostly because it is not a significant force in the economy to begin with.

Greece is in a state of disarray at the current time by its own self-will. It has always desired to have a country like a Rolls-Royce, but in the economy of a VW beetle. Many times, it has been proven that socialism does not work, and the Greek economy is a prime example. You just cannot live in a welfare state when you only have borrowed money to support the economy.

There are numerous examples that represent this scenario, and I will not bore you with all of them. I did want to give you a few examples of how the Greek economy devolved into its current state. As of 2008, the Greeks had no fewer than 133 public pension funds. Each fund had its own little bureaucracy and the federal government in Greece had virtually no control over them. The 2010 version of the Greek tragedy included sanctions from the troika (European Commission, European Central Bank and the IMF), which mandated a total and complete reform of the federal pension laws in Greece. As of this date, NONE of those reforms have been implemented.

In Greece, 18% of the GDP is spent on public pensions. Compare that with Ireland, who only spends 7% and the U.S. who only spends 5%. Even those numbers are suspect though, given the complexity of the Greek pension plan and the poor reporting that goes along with it.

In 2010, the Greek government was required to privatize state-owned companies and assets to consequently bring in €50 billion from the sale of these properties. As of today, the Greek government has only sold off €2.5 billion of those government-controlled assets. The public sector wages in Greece are now 25% higher than in Germany, and virtually all food costs more in Greece than any other European country due to import restrictions.

Greece imports virtually all of its products, including pharmaceuticals and most of its food. Essentially, Greece is a country of takers, not givers. In the last two weeks, banks have essentially been closed down, only allowing Greek citizens to take €60 a day, thereby causing the economy to be completely shut down. It is now estimated by the Wall Street Journal that it would take a minimum of $25 billion just to prop up the Greek banks, so they can be open to the public and operate in a normal way again. Currently, the outstanding debt of Greece is 177% of GDP, which is falling on annual basis.

Greece has struggled with demographic challenges as an aging population, and a weak economy has complicated the Greek situation. There is virtually no amount of money that will save their economy until their economy picks up, yet the governments in Greece are not willing to take the necessary actions that will allow the economy to accelerate. Greece has roughly the same size economy as the state of Louisiana, yet they have 10 million residents while the state of Louisiana only has 5 million. I do not need to belabor this point; essentially, there are a lot of people in Greece not working and not contributing to the economy.

With all of that said, there is a very simple solution to Greece’s financial mess. Basically, an agreement will be reached where European countries will loan them enough money to repay the debts currently due to European economies, and Greece will agree to austerity and other economic sanctions. It is also very clear that they will not comply with those sanctions and we will be right back in this situation in a few months, years, or decades from now. It has been that way for 2000 years. Why would you expect anything different this time?

The effect on the U.S. economy of Greece’s misfortunes is practically zero. Back in 2008, the Greek banks constituted a real problem for U.S. banks, since many of those U.S. banks held Greek debt. Seven years later, that is not the case. It was interesting to see the U.S. banks selloff with the news of the Greek problems. However, U.S. banks own virtually no Greek debt. Almost all the debt of Greece is held by the governments of Europe or the international monetary fund. If Greece were to fail tomorrow, virtually no U.S. Bank would be impacted by that decline.

CNBC ranks Rollins Financial, Inc. #20

There is also a fair amount of hand-wringing when it comes to the Chinese stock market selloff. When the market declined over 30%, the normal “doomsayers” in the U.S. proclaimed that the same would apply to the U.S. stock market. However, they failed to point out that the Chinese market has been up close to 100% over the last 12 months, and even after the dramatic selloff, the Chinese market for the year 2015 is up 19%. That would make it one of the best performing stock markets in the world, and therefore very successful. It went too high, it went too low, and now it is about right – Goldilocks stock market. Virtually, nothing that I have discussed so far has anything whatsoever to do with the U.S. and other developed countries’ economies.

There is one very important point about the Chinese stock market that uninformed readers need to realize. The stock market in China is basically a political organ of the government and not a barometer of economic reality. It is very clear that the stock market in China has no correlation to the economy in China. The government wanted the stock market to go higher by improving investor sentiment and creating wealth among the middle class. It is very simple to see that if the average Chinese person is able to increase his or her wealth through stock market performance, they will eventually cash out that wealth and spend it on consumer items, improving the economy. All of that is very difficult for U.S. investors to understand, given the foreign nature of a communist government controlling an otherwise free stock market exchange.

However, with all investments, eventually truth runs out and the Chinese stock market had to unwind from such lofty levels. With the government’s intervention into the market, it has now rallied again. However, a very important point lost in all this conversation is that the Chinese stock market, even after the selloff, is only selling at 20 times earnings of the underlying companies. That level of earnings is not significantly greater than the U.S. market, which is clearly not overvalued.

You need not be a brain surgeon to see that the U.S. economy is fine in most every respect. Even though GDP is not accelerating at a rapid rate, it continues to be soundly solid. The three components of investing (interest rates, earnings, and the economy) are all positive for upward movement in the stock market. It is estimated that the second-quarter earnings will be down 4% quarter to quarter. However, if you analyze these numbers, you will see that virtually the entire decline is centered in the energy sector. With oil prices one half of what they were last year, it is fairly clear that earnings in those companies cannot accelerate. However, the rest of the economy will report record earnings this quarter as they have for the last several years.

If you do not believe these numbers, just ask the people on the front end of economic expansion; ask an architect you know whether they are busy at this time; ask any engineer if they have projects in the works that have yet to be done. You will find that most are working at capacity or greater. If you look around Atlanta, there are construction cranes everywhere and projects being built. In fact, construction contracts, as reported by F.W. Dodge are up 41% year-over-year. Many of these contracts are in the development stage and construction has not even begun. Once construction starts on these projects, a lot of people will be put to work and each additional payroll creates GDP in the United States.

It has often been reported that housing is the real energizer of the U.S. economy. Just look around you and you will see houses under construction. New housing permits are up 25% year-over-year and growing. Even though we are not at the 2007 levels yet, there is a vast amount of work starting on housing. Although a permit is a long way from a housing start, it indicates you the intent to build houses in the future. As that housing boom starts to roll out, many people will start to work and GDP will improve.

A great deal of investing has a lot to do with consumer confidence rather than economics. Do people buy a new house or new car when times are bad? The answer, of course, is no, but when consumer confidence is high, people spend a great deal on vacations, cars, house additions, etc. Consumer confidence in June was 101.4% as compared to 86.4% one year preceding. Whether you realize it or not, consumer confidence unleashes pocket books which creates commerce.

There is absolutely a direct correlation between new cars and homes purchased and consumer confidence. When times are bad, people dig holes and do not come up for air. When times are good, people use their resources and consumer financing to purchase, spend, and develop. As we sit here today, all of those are extraordinarily positive signs for a higher GDP in the U.S.

It is just an important part of investing that you understand that things that happen at geopolitical events may or may not affect the U.S. economy. Some things clearly do, and others clearly do not. While Europe would be impacted by a failure in Greece, whether that country succeeds or fails has virtually nothing to do with the U.S. economy and virtually nothing to do with the U.S. stock market. Those of you reading this post that think that you need to be out of the market during these volatile times need to take a deep breath and just watch it happen.

While it is a very minor adjustment that has occurred in the market during June and July, it convinces me more than ever that a big rally is coming. At the current time, over one half of the stocks represented by the New York Stock Exchange are on a 52-week low. Every time I hear a commentator say that the U.S. stock market is trading at unrealistic levels, I hope they have reviewed that very important statistic. With interest rates low and likely to be low for another couple of years, and earnings that continue to be excellent and growing in an economy that is expanding even modestly, these are all positive indicators for higher stock prices in the future.

I am very much in the camp that the markets will continue to climb over the next 18 months to 2 years. It will not be a straight up move, but rather a gradual increase in the value of your portfolios. However, if you are not invested you cannot grow your portfolio.

We speak with people every day that have had their money in cash since 2008. Those people have lost the opportunity of a 200% gain in the market and are reluctant to reinvest until the next market crash. Based on the imperial evidence that basic economics brings us, they may have a long time to wait.

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

Best Regards,
Rollins Financial, Inc.