Friday, September 7, 2018

Why would anyone invest with any advisor that is not a fiduciary?

I have wanted to write extensively on the title of this posting because I consider it to be of the utmost importance. Everyday I think to myself that there are so many investors losing out on one of the greatest bull markets of all time. With the stock market up over 20% in 2017, and up almost 10% so far in 2018, so many investors have wasted a once in a lifetime return with financial advisors that do not have their best interest at heart. I will continue this discussion in greater detail later in this posting.

Lucy & Harper Wilcox

Lucy (6) and Harper (8)

Eddie Wilcox and wife, Jennifer

Before I discuss that topic, I have to discuss the extraordinarily good month of August 2018 from an investment standpoint and once again emphasize the strength of the U.S. economy and why markets are likely to continue to advance even after they hit all time highs in August. The economy at the current time could not arguably be better. GDP was adjusted higher for the second quarter and unemployment actually ticked down. Corporate earnings are now exceeding the 20% year over year estimates and the consumer has the highest optimism levels in over a decade. What is even more important is interest rates continue to be unbelievably low, despite being higher this year, and inflation is moderate. All things considered it is the perfect Goldilocks economy. Not too hot, not too cold - just right.

For the month of August, all the major market industries posted all time highs. The Standard and Poor’s index of 500 stocks was up 3.3% during August and up 9.9% for the year to date in 2018. The one-year period it reported an excellent 19.7% increase. The Dow Jones industrials average was up a more moderate 2.6% during August and it is up 6.7% for the year 2018. For the one-year period it is up 21%. The real winner during the month of August was the NASDAQ composite, it was up 5.8% in August and is up 18.3% for the year 2018. For the one-year period the NASDAQ composite is up a sterling 27.4%. For those of you that continued along investing in bonds, the Barclays Aggregate Bond Index was up 5% during the month of August but has a negative return for 2018 at -1.2%. For the one year period that index has generated a loss of 1.3%. As you can see any investor that has a significant allocation to bonds is not even coming close to generating a return as high as the underlying rate of inflation.

Due to the new highs being reached in the markets, a great deal has been said in the press lately regarding the potential for a huge decline in the stock market. I am not sure where the naysayers are finding their research on this subject since it is not supported by economic facts. Yes, it is true that the major market industries have hit all-time highs, but the market, by any measurable standard, is not overpriced. Due to the huge increase in earnings that U.S. corporations have realized over the last several years, the P/E ratio is still maintaining historically moderate levels.

If you look at the current earnings for the next 12 months, the P/E ratio for the Standard and Poor’s Index of 500 stocks is only at 17. If you evaluate the last 4 decades of investing you will find that, on average, 17 is the standard valuation represented by this index. So, when your neighbors or friends tell you the market is overvalued, ask them exactly what standards they are using to make this determination. In every decade since the 1920’s the average P/E ratio for the S&P Index has been 17, precisely where we are today!

About 90 days ago, there was much discussion in the press that the inverted bond yield would in fact push the economy into recession sooner rather than later. However, not many people have mentioned lately that the 10-year Treasury has actually declined, hovering around the 2.8% range over the last 90 days. There is actually an economic reason for this lack of movement, although the Federal Reserve continues to push short term rates higher. What we are seeing is a moderating inflation cycle that has not exceeded the 2% threshold as mandated by the Federal Reserve. But more importantly, there is a huge drag on interest rates by the 10-year Treasury rates in competing countries. If the Federal Reserve pushed up rates too high, money would flow out of foreign currencies into the U.S. dollar, hurting their economies and making their currencies less competitive. Trust me; I don’t think the Federal Reserve has any intention of creating that chaos and is likely to only make one more increase in 2018.

It is amazing to me that I have to explain to people how well the economy is doing. You do not have to look far to see all of the construction cranes in Atlanta; and good luck trying to get reservations at your favorite restaurant. Have you noticed that traffic is terrible everywhere you go, at all times of the day? I drive by the full parking lots of Lenox Square and wonder to myself why anyone would be inside a mall on a beautiful Saturday afternoon.

The department of labor has just announced that the unemployment rate continues to be below 4%. The economy added 201,000 jobs during the month of August, which by all historic standards is a very slow month for employment. As I have pointed out in these pages for many years, the more people you have working in America, the better the economy will be. With more jobs you will see the economy pick up in every respect and right now we are above full employment in America. If you want to know how strong the economy is you have to realize that U.S. employers have added to payrolls for 95 straight months. This is the longest extended job expansion in the history of the United States. Also, it was reported that manufacturing activity in August expanded at the strongest pace in more than 14 years and U.S. corporate profits boomed in the second quarter. I am not sure exactly what type of evidence that you would need to accept the reality of the strength of the economy, but those statistics are pretty compelling.

There is no question that there is economic uncertainty in the emerging markets and of course in the world’s smaller economies. Much of this uncertainty and the decline in value is a direct result of the issue with tariffs. However, from a true economic standpoint, the cheapest markets in the world today are Asia and the other emerging markets. They are however, not investable at the current time since the momentum traders continue to create economic chaos by forcing these stock markets down. The traders have neither the capital nor willpower to stay in these trades forever. Even though the emerging markets have incurred 5-6% losses over the last 90 days and are today trading down -7% while the S&P is up 10 %, it will be a quick rebound. Obviously, no one knows exactly what date this rebound will occur, and we are better off not investing in those markets until it does. I’ll bet that you will see the emerging markets rally late in 2018.

The month of August was an excellent month financially, but the more new clients I began to see coming in, the more I questioned why anyone would entrust their hard-earned money to an advisor with no fiduciary responsibility. I see so many cases of new clients who have been taken advantage of by previous advisors, and yet people out there continue to invest with non-fiduciary advisors. Many of these large brokerage houses and banks do not have your best interest at heart; they invest your money in investments that benefit them more than you. It just baffles me that anyone would take that risk, and I intend to cover that matter later in this posting.

Ava at the beach, age 7

Carly Kramschuster at the Braves game

Let me give you a couple examples of what I have seen over the last few years with new potential clients. I had a lady come in recently who was 72 years old. She had absolutely no knowledge of the financial markets and no real understanding of what was going on with her money. However, at 72 years old she was fully retired and expected to live off of her retirement money. She, like many others, was scared to death of investing in the stock market and was therefore drawn in by an advertisement from an insurance company that guaranteed her 6% for the remainder of her lifetime.

She had no idea exactly how this annuity worked and gave me the actual document to read, which ran close to 100 pages. This lady was 72 years old, but the annuity provided that for the very first 10 years of the annuity she was not allowed to touch it. Therefore, her money was tied up from age 72 to age 82, during a time where she desperately needed the cash flow for her monthly needs. This is an example of how insurance agents take advantage of retired people. When you think about it, after the money has sat for 10 years, the commitment to pay 6% over time is hardly a stretch for even the worst investors. The lady decided to cancel the annuity so she could have ready access to the money and transferred it to another form of investing, incurring a penalty of roughly $60,000.

We had an unfortunate situation where a husband died tragically early, but fortunately for his wife and family he had roughly $1.5 million in life insurance. Six months after making this transaction, with annuities from the insurance company, the widow realized she had no opportunity to spend the funds that were to be her livelihood after his death. After a while, she determined that the annuity was impossible to live on based on her cash flow and agreed to take a $150,000 penalty for canceling the policy. Another example of why these types of deals should be illegal... Did the agent really have the widow’s best interests at heart?

We had two clients in recent weeks that had very large government pension plans. If you think about it, a government pension is much like a fixed income portfolio since it pays out for life at a reasonable rate of return with no volatility. It also goes up annually with inflation so it is a wonderful hedge against future expenses. In addition to their wonderful government pension, they had $500,000 or so in fixed rate investments. If you put that on paper, you would quickly see that virtually 100% of their money was in fixed income, with their investments earning next to nothing over the past few years. This is a classic case of an investment advisor who did not understand a client’s entire finances and recommended investments that benefitted him more than the client. Once again, a prime example of why there should be a regulation to keep advisors from taking fees from products they sell to clients.

Recently, I had a very distinguished couple come into my office who lived entirely off of their investments and social security. They had roughly $500,000 invested with their local bank manager. I asked if I could see their investments and found that every dollar was invested in tax-free municipal bonds. Of course, over the last few years as the interest rates have been rising, they have made no money whatsoever on their tax-free bonds. This led me to wonder whether they had a substantial tax problem and thus the need for the bonds. When I looked at their tax return they had zero taxable income and had not paid any income taxes over the last decade. This type of poor advising of the clients is the reason we put so much emphasis on taxation in our investment plans.

Shortly after I started my business in 1980, I would get up every morning, get fully dressed, and sit down at my desk. I only had a few clients and not much to do, so the highlight of my day was when the Wall Street Journal arrived in the mail. By that time it was 2 days old, but it was still news to me. There was no internet and obviously no financial news programs on television. You had to get your financial news the old fashioned way: the newspaper. I would study the Wall Street Journal from cover to cover, reading virtually every article regarding investing and tax matters. It would literally take up the majority of my day, right up until 4 o’clock when M*A*S*H would come on the TV. So, my day would be occupied by reading the financial news and enjoying the Korean War again for basically 10 hours a day. Needless to say, I have seen every M*A*S*H episode that was ever made.

One day, I received a phone call from my “friend” at Merrill Lynch. He indicated they had a unique opportunity that he thought I should invest in. Basically, it was an orange juice manufacturer near Tampa with its own groves that processed orange juice for wholesale. Since my “friend” had recommended it, I elected to buy 1,000 shares at $6.50 per share, which was a world of money to me at that time. Since I was new to investing, I had no knowledge of the conflicts of interest that major brokers legally practiced. With great anticipation, I was sent the confirmation of my purchase and watched it daily in the coming weeks and months.

After about two months, the stock began to fall. I called my broker to find out if there was some negative news I should be aware of, and he indicated no, everything was fine. On the 90-day anniversary, my outstanding stock was now down to $3 per share, losing more than 50% of its value. At that time, I decided it was time for me to find out exactly what was going on. It was not like I had anything else to do, so I booked a flight to Tampa to attend their annual meeting and see exactly what the company was all about. Clearly, I should have done this prior to investing, but again, I was a novice and learning as I went along.

At the annual meeting, the president of the company strolled in; I vividly remember that he was wearing a yellow seersucker suit and was smoking a cigar. To this day, he is still the most obnoxious host I have ever been around in a public setting. He refused to answer questions from the audience, dodging any inquiries into the company’s financial standing. After the meeting, I did an analysis of the financial statements. I found that while the orange groves were on the balance sheet of this public company, they were actually purchased by him personally and he was draining off most of the company’s profits through rent of the actual groves themselves. This was a clear conflict of interest with the business and even I, the proud owner of a mere 1,000 shares, could see it.

I mention this story, not to explain how I lost money since I eventually sold the stock for about $1 per share, but rather to point out the conflicts of interest that play a major part in non-fiduciary brokers’ and bankers’ income stream. I found out later that Merrill Lynch was the underwriter of this particular security, meaning they billed large sums for providing this service. At that point, they turned over the security to their retail brokers and instructed them to call on their best clients and sell out the inventory of the underwriting. By virtue of ten thousand brokers calling their clients across the United States, there was an immediate demand as Merrill Lynch sold off the shares from their inventory. As you would expect, after the entire inventory was sold there was little demand for the stock. The volume collapsed since Merrill Lynch was no longer selling or buying the stock and it ultimately failed, dropping to an almost worthless value.

If you have ever wondered why your broker calls and asks for your permission to buy or sell a particular security, there is a specific reason. Unless they are operating as a fiduciary, as we are, they need your permission to do so. And because they receive commissions on these trades, they clearly need your consent. In addition, they have the authority to lend your shares to short sellers and basically treat your shares as their own while it is held in their accounts. This brings me back full circle as to why you would ever make an investment with any broker or advisor that did not have a fiduciary responsibility to you. My “friend” at Merrill Lynch was never my friend again.

You would think that this concept is so basic in nature that I would not even have to ask that question. It really all comes down to “Do you trust your advisor,” and “Who is truly benefitting from your invested dollars?” If you buy an annuity or life insurance policy with a huge upfront commission, you need to understand that the product you purchased paid a large fee to the person who sold it to you. You should never have to question whether a recommendation from your advisor is better for you or for them. If you are dealing with an advisor that is a fiduciary, you will never have to worry about this matter since no commissions are ever paid to them on investments made.

One of the basic concepts of our practice when I set it up in the late 1980s was that I wanted everyone to know that we would never take a fee of any kind from anyone but our clients. We have no financial relationships with the custodians, the mutual funds, etc. The only payment our firm receives is from our clients - never a third party. A concept as simple as this should be established by any major advisor. Unfortunately, people on a daily basis entrust their hard-earned retirement money with advisors that benefit directly from the investments themselves and not from their clients. The lesson to be learned here is, never invest your money with any advisor that is not a fiduciary.

We encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins

Thursday, August 30, 2018

Happy Labor Day!

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 3rd. Please note that all major U.S. stock exchanges and banks will also be closed due to the Labor Day holiday.

Our offices will reopen for business on Tuesday, September 4th at 8:30 a.m. If you require immediate assistance on Monday, please do not hesitate to contact our staff via email:

Joe Rollins at
Robby Schultz at
Eddie Wilcox at

Please be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Wednesday, August 8, 2018

Save the Date - Dow 45,000 in the Next Decade!

I always try to write a controversial title for the start of my blog to try to get you interested in the contents. However, the above title is neither controversial nor outrageous. We will almost surely see the Dow hit 45,000 in the next decade, and I will explain later why that is possible. Every day, I read the financial journals where someone is forecasting economic disaster for the U.S. and its equity markets. However, rarely has there been a time in our lifetime when the economy has been stronger or our dominance in worldwide trade more superior. I will explain all of this later. In addition, I want to share a few subjects that I’ve been thinking about.

Ava and Caroline at Cooking School
Ava in her new Astronaut Suit from the Air and Space Museum

However, before I get to the more interesting stuff I have to reflect upon the markets performance for the month of July. It was quite an excellent month for the financial markets, which have been very successful in 2018, contrary to popular opinion. The Standard and Poors Index of 500 stocks was up 3.7% during July, and up 6.5% for the year 2018, and up 16.2% for the one year period on July 31st 2018. The Dow Jones Industrial Average was up a robust 4.8% during July and is ahead 4.1% for 2018, and the one year period then ended up 18.7%. The Nasdaq Composite was the laggard in July, up a more modest 2.2%, however, it is up 11.8 % for the year 2018 and for the one year period it is up 22.2%. I always like to give you the comparison with the bond market to reemphasize the point I have written so many times , if you are a large holder in bonds you are likely to well underperform the equity markets. The Barclays Aggregate Bond Index was exactly flat for the month of July and is down 1.6% for the year 2018 and down 1% for the one year period that ended. As you can see, investing in bonds has been a losing proposition over the last one year period; exactly as I predicted.

I received a lot of comments over the last article I wrote regarding a few topics about my father. Some of the comments were reflective. Some clients I have serviced over the last 30 years exclaimed that they had no idea that my father was a Methodist Minister. I guess I did not do a very good job of telling this story.

One of the most interesting memorabilia I have in my office is the actual hospital bill from the day I was born. At that time my father was a Minister in Norton, Virginia, which was a small coal mining region in Southwest Virginia. That bill from the hospital, dated when my mother and I were sent home on September 3, 1949, reflected a total amount due of $50.64. It even set out the circumcision fee of $2 which was low since it “wasn’t that big of a deal.” What is interesting about this piece of memorabilia is that attached to it are the receipts from the church members who actually paid the bill, with one gentleman paying $5 and some of the others paying more. The note attached reads, “Because we love you we hand you herewith your hospital bill mark paid.”

What is interesting is that I had never seen this bill until after my father’s passing. I did know, however, my father was a beloved figure in Norton, Virginia, even though I was only a child. The church had very small memberships and could not afford many nice things. But I do remember that my father became the general contractor and actually built the sanctuary of the church during our stay in Norton, Virginia. I also remember as a child, going back there often for weddings and funerals long after he had left that particular church. This hospital bill was prior to the time of medical insurance and even though my mother was there for 3 days, the total bill was only $50.64. The important part was the show of kindness from the members of the church who actually paid the bill and the fact that my father was so touched by that kindness that he kept the bill and the receipts for the remainder of his lifetime. Hopefully this gives you some insight to what he considered the important things in his life.

I also wanted to give you a quick update on some of the items I wrote about in the last posting related to tariffs. It seems now less than a month later, the European Union has agreed to play nice with the U.S. and to reduce tariffs so that they are equal. It also appears that Mexico has jumped on board and has agreed to re-write NAFTA; Canada not so much. It didn’t take long for two of our largest trading partners to agree with President Trump that free trade means exactly that. Its free for both sides. As I forecasted in that last posting, it will not be long for the rest of the world to agree also. Frankly, they have no choice.

Many commentators are writing that the contentious trade negotiations with China would have catastrophic results in the equity markets. They just do not seem to understand that the only loser in this trade war will be China. Since they sell to us five times as much goods as we sell to them, the hit on their financial markets will be substantially greater than the minuscule change to our economy. Oh yes, I fully understand the issue of trade barriers creating inflation but the economy in the U.S. is so strong at the current time that we need to get this straight and if it means we must suffer some inflation to bring China into the 21st century, then so be it. As the President so correctly pointed out recently, the U.S. economy is playing with the house’s money and we can not allow this golden opportunity to go by without satisfying the problem with China when it comes to intellectual property and state supported enterprises. We have made great progress in only a few months and I expect to see the rest of the countries fall into line shortly.

You may wonder how I can express so much confidence in my headline that the Dow will reach 45,000 in the next decade. A lot of my optimism is reflective of the current, strong U.S. economy. Of the first 275 companies in the S&P 500 Index, 81% have already reported earnings that top estimates. If these numbers hold up for the rest of the reporting period, it will be the highest win rate on record since 1994. So I got to thinking the other night what exactly it would take to reach such a lofty number as 45,000 within the next decade. Simple arithmetic proves the point that even a 6% average annual yield on the S&P 500 would reach a number well in excess of 45,000 within the next decade. And, oh yes, for your doubters out there, I will give you some comparisons to reflect on this number.

Just so you don’t assume I picked some arbitrary number, I looked at the S&P 500 Index which is a much broader index than the Dow. The Dow only includes 30 stocks, while the S&P 500 includes 500 of the largest stocks in the U.S. I think this index is much more reflective because it includes a much broader group of individual companies. So how has this index performed over the last few years?

Through the end of 2017, the S&P 500 Index has had an annualized yield of 15.79% over the last 5 years. Over the last 10 years, which included the year 2008, where the S&P lost 38% the average return over that 10-year period was 8.49%. If you look at the 15-year annualized return, that number comes in at 9.92%. If you go back over the last 20 years, which included multiple recessions along with the meltdown of the dot-com era and of course 9/11, the annualized yield is 7.19 % and for the 25-year average return that number comes in at 9.69%.

If you look at all of these examples above you will note that all are substantially above the 6% hypothetical number I have proposed. And as you also will note, some of these average returns are significantly greater than my 6%. The one thing that investors just can not seem to get their heads around is that it is perfectly possible for the index to go down and go down significantly in a year. However, when you talk about average returns, you are averaging those negative returns yet you still get outstanding long-term results.

I think I am perfectly comfortable with assuming a 45,000 Dow within the next decade, since I have assumed a relatively low annual gain, and given the strength in the U.S. economy it does not appear that a recession is anywhere in sight for the next several years. Even though I have picked a decade as my benchmark, in all reality we are likely to reach that threshold if not years, then maybe months earlier. Save the date!

I guess there are just some things about the economy and the way it is reflected by the financial news that I cannot understand. It seems there are reams of paper written on the subject of the collusion between the U.S. and Russia. While this is a hot topic, we can rest assured that at least Russia does not pose an economic threat to the United States.

As I reported in my last post, we spent two weeks in the wonderful country of Italy. What is true of Italy is that no one really works that hard. It’s a country based upon reflecting on its beauty, drinking fine wine and eating delicious food. No one ever accused Italy of being an industrial giant and I suspect that there are not many Italians, if any, that die from being overworked. However, there is a parallel that you should recognize.

Did you realize that the GDP of Italy is greater than the GDP of Russia? Last year Italy posted a GDP number of $1.9 trillion. While Russia posted a GDP of $1.57 trillion. Who would have ever thought that a country like Italy not known for its industrial growth would actually have more GDP than Russia. I am a little baffled why the financial news makes such a big deal of the threat of Russia. Yes they have their nuclear weapons but their economy is weak and could easily be crushed by sanctions from major countries.

The U.S. had a GDP of $19.4 trillion in 2017, 10 times the size of the economy in Russia. Additionally, Russia has vast natural resources, but not the money or the capital to exploit them. Due to the harsh weather in Russia, their agriculture is weak and they almost export nothing other than natural resources to other countries. How anyone migh classify them as a financial threat ignores the actual facts.

Also, did you realize that the state of California GDP at $2.7 trillion is almost double the size of the economy in Russia. Even the states of Texas and New York have GDP greater than the entire country of Russia. Maybe we need to find another threat to our economy since Russia clearly does not measure up.

I continue to be very optimistic for the financial markets for the rest of the year, and in 2019. It looks like we are well on our way to meet our double digit returns for 2018. Many critics said I was out of my mind to propose such a huge increase in the markets after the S&P went up 21.83% in 2017. But my optimism is not based on sentiment or the alignment of the stars. Its based on the absolutely solid economic data that the U.S. is reporting.

For the S&P companies reporting so far this year sales are up 10% year-over-year. It is fairly remarkable that sales continue to go up in light of the so-called tariff battle ongoing. But the most important component is earnings are up 28% and are currently projected to go up 29% in the third quarter of 2018 and 25% in the fourth quarter of 2018. If we come close to making either one of those estimates for the remaining quarters of 2018, then the markets are significantly undervalued today.

GDP was reported at 4.1% for the second quarter, which was extraordinarily good. No one has any idea what the rest of the year will bring but most assuredly the GDP for 2018 will be above 3%, making it one of the best years in recent memory. The unemployment ratio continues at 3.9%, virtually an all-time low. There is no question inflation is making its way through payroll and employers are having a harder time finding qualified workers. From an employer’s standpoint that is certainly a negative, but from the employees standpoint it is a true positive. As employees make more and more money then consumer confidence goes up, more consumer goods are sold and the economy only gets stronger. How someone sees a negative in this positive ratio defies basic common sense.

And what is happening in residential real-estate is quite remarkable. There is a pronounced shortage of residential homes in America, and homes cannot be built to accommodate the rising demand. But there are certainly regions of the country where valuations are stretched - a large portion of the country is underutilized and can afford to build many more houses without increasing the inflation of the cost of housing.

Just so that you don’t think that I am oblivious to the negatives, I read them also. I know that at a certain point unemployment will create wage inflation and that’s an overall negative. I also understand that a demand for housing will increase the cost of housing which corresponds with a decrease in the demand. I understand that economic theory, but we are not there yet. I also understand the inverted bond-yield where short term interest rates are higher than long term rates. We are not there yet either, but history tells us even when we get there the effect is not negative in financial markets for 2 to 3 years. Why on earth would we be worried today about something that is not likely to happen for 2 to 3 years from now?

In summary, the positives so far outweigh the negatives and you cannot help but be totally optimistic. As I often mention, the three components of higher stock markets are firmly in place. Interest rates continue to be low, although higher than they were a few years ago, and earnings are extraordinarily high and only getting better. That’s the most positive of the positives. And as we sit here today, the economy is stronger than it has been in many years. Therefore, we still have in place the trifecta of the economic components that make markets higher. So as I read the negative financial headlines on a daily basis, all I can ask of you as investors is to sit back and enjoy it.

As always we encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. I had a client who came in the other day who expressed complete optimism regarding the equity markets. He emphasized to me his goal was to have S&P type results in his portfolio but the one thing was he never wanted to lose money. If you expect those types of financial results it is unlikely you are looking realistically at how markets work. Give me an opportunity to explain.

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

Best Regards,
Joe Rollins

Wednesday, July 11, 2018

Whether you like it or not, tariffs are the right way to go - let's talk economics and not politics.

From the Desk of Joe Rollins

We just ended the first six months of 2018 and while the markets have been quite volatile and the flood of news (real and fake) have been overwhelming, it has been a satisfactory time for the growth of your assets. I have so much to talk about in this blog that I guess I will need to give you the cliff notes rather than the full book. I want to discuss the flood of bad information we are seeing regarding tariffs, and separate the reality of the economics of tariffs from the politics of someone wanting our current President to look bad. In addition, I will bring you up to date on a recent national award that our financial firm received. This is the third national award that we have received over the last three years – none of which we applied for, asked for, or paid for. It is always very rewarding to be recognized in your profession, especially when you are not seeking recognition. In addition, I will bring you up to date on a Netflix series that you might be interested in (especially if you are my age) that brought back many bad memories.

Before I begin discussing all of these interesting topics, I must give you the financial headlines and the market performance for the first six months of the year. The Standard and Poor’s Index of 500 Stocks was up 0.6% for the month of June, ahead 2.6% for the six months ended June 30, 2018 and up a sterling 14.4% for the one-year period then ended. The NASDAQ Composite was the real winner for the month: up 1% for June, up 9.4% year-to-date and up 23.6% for the one-year period ended June 30, 2018. The Dow Jones Industrial Average was down 0.5% for the month of June, down 0.7% year-to-date and up 16.3% for the one-year period ended June 30, 2018. Just for comparison of stocks as compared to bonds, the Barclays Aggregate Bond Index was exactly zero for the month of June, -1.7% for the six months ended June 30, 2018 and -0.6% for the one-year period then ended.

For the last several years, I have explained that it is unlikely that bonds would be a profitable investment in this economic environment and the numbers have proven that fact. Yet, every day I read about allocations of portfolios to bond indexes and shake my head in bewilderment. I am not exactly sure why you would be willing to invest in an asset that is almost guaranteed to go down. I think one of the major problems in the financial advice sector is that too many advisors operate with the old playbook where you allocate portfolios based upon someone’s age without much thinking or discussion. I would like to think that we are much more proactive and use actual economic performance rather than traditional playbooks that oftentimes are outdated or inappropriate for someone in your financial situation. One of the great benefits of allocating a portfolio specifically for that investor is that we can tailor that portfolio based upon knowledge of all your assets and liabilities. I have come to believe that way too many advisers use formulas that do not perform well in this economic environment. I guess maybe that is the reason we continue to receive national awards and grow assets.

Joe, Dakota, Ava, Josh and Carter in Rome - Three Coins in the Trevi Fountain

Ava holding up the Leaning Tower of Pisa

Dakota, Ava and Joe on a gondola in Venice

I read so many economic newsletters, papers and follow so-called “experts” in forecasting the stock market that sometimes my eyes glaze over while trying to actually understand where these experts get their financial information. The most recent example of this overreach in trying to explain a simple concept is the issue of tariffs. It seems that so many of the commentaries today are actually foaming at the mouth regarding tariffs, and it makes me wonder whether they really understand what they are discussing. There is absolutely no question that everyone would be better off without a tariff war. I am not exactly sure why these commentators are asserting that we have one today, but maybe I can explain the economics so that you can cut through the haze and see that the President is actually on the right course as compared to the headlines.

Simplifying tariffs is relatively simple. The European Union imposes a 10% tariff on all cars imported from the United States. I just came back from a two-week tour in Italy. You see absolutely no cars in Europe by names that you would identify as built in the U.S. I can honestly say I saw less than 10 cars with U.S. based names on them, and even then, I do not know that they were not built in Europe. Contrast that with walking down any street in America. The vast majority of the cars you will note have been built in other countries. Mercedes, Toyota, BMW, Honda, Kia and other cars actually constitute the vast majority of cars driven in the United States. I am not trying to say that some of these cars are not built in the United States, but I rather suspect the vast majority are imported rather than being manufactured here. So, this is a prime example of how tariffs are unfair and do not constitute the economic destruction like the financial blogs are projecting.

The United States levies a 2.5% tariff on cars imported into the U.S. and the European Union imposes a 10% tariff on cars imported into Europe. Yes, there is a higher tariff on light trucks coming out of Japan, but for the sake of keeping this illustration simple, we will only talk about cars. How can any financial analyst agree that the tariffs between the United States and Europe are on an equal basis? Why wouldn’t the U.S. deserve exactly the same tariffs into Europe as they levy into the United States?

The President recently proposed that there would be a 20% tariff on all cars imported into the United States, and Europe came back with an announcement that they would consider equal the tariffs into the European Union. Think through this statement for a second. The United States exports almost no cars into Europe while the European Union exports the majority of their cars manufactured in Europe to the United States. Just exactly who do you think would be hurt more by this equalization of tariffs?

As an investor for 40 years, it really fascinates me how the stock market reacts to these quotes by the President. You have to understand that the President of the United States made famous “the art of the deal”. He proposes a 20% tariff on Europe in order to encourage the Europeans to reduce their tariffs to the United States. Absolutely nothing has happened economically but the market reacts in bewildering swings both up and down. At the end of day, if the President could accomplish a tariff that would be zero both to the U.S. and to Europe for importing cars, he has performed a great service to us all. Why, for any reason, that the market would go down with that good news, continues to be a conundrum that perhaps I am just not smart enough to understand.

So, when you are talking about tariffs, no one wants a tariff war. What our President wants and what this country deserves is equal treatment of tariffs. Of course, we would prefer that European countries come to the United States to manufacture, employ our people and pay taxes, but more than that, we want equal tariffs in both directions so that all companies can compete regardless of where they are located.

Reid and Caroline, children of Partners Robby Schultz and Danielle Van Lear, are enjoying the summer!

Paw Patrol at The Fox

Big Canoe

There has been much said about the proposed tariffs in China. Once again, I remind you that China imports roughly $500 billion worth of goods into the United States. The U.S. exports to China roughly $130 billion of goods per year. It is pretty simple to see who has the most to lose in a tariff war with China. But more importantly, at some point, we have to hold China accountable for their clear intent to steal technology from the United States. They openly require companies to manufacture in China, but in doing so, they require them to turn over their intellectual property for free. I think the President is absolutely correct in calling their hand on this, as so many presidents before have elected to ignore.

But let’s talk about the economics of the transaction as compared to the politics. Let’s assume that it would be possible for China to restrict 100% of the goods shipped from the United States into China. So, in this hypothetical situation, we would lose exports of $130 billion in an economy that this year will be in excess of $22 trillion. You can do the math (if you can figure out all the zeros) but the effect on the GDP would be less than 0.6%. And that is assuming that China can do without the goods and would not buy them anyway without the higher tariffs. Even though it is what you read almost every day in the financial news, to assert that this loss of exports would have any economic effect on the U.S. is absurd. The theft of the intellectual property of U.S. based companies is much more worrisome than the sale of $130 billion of goods.

There is no question that you can find specific examples of companies that would be hurt by tariffs. But once again, while it brings great pain to a specific company, the economic effect to a legendary company such as Harley Davidson is practically nothing for the long-term growth in the U.S. economy. However, the loss of $500 billion in sales to the United States from China would have a severe economic effect on China, and that is the reason why a deal will be reached. There will be high profile reports going back and forth, but at the end of the day, China needs us a whole lot more than we need them.

We received news on Friday that the economic news continues to improve on a monthly basis. For the last several months, it has been like Christmas with the flood of new economic evidence that the economy is on firm ground. On Friday, it was announced that for the month of June, the U.S. added over 220,000 jobs. Many of the headlines read that the ratio of unemployment increased for the month, but if you saw that headline without reading the details then you missed a major point. Yes, it is true that the unemployment report indicated that the unemployment rate was 3.8% last month and 4% this month. However, the underlying news indicated that over 601,000 new people entered into the labor force during the month.

A lot of these newly employed were college graduates just beginning to look for jobs, but it more likely included a lot of people who had not been looking but wanted to get into the tight market for workers that we are witnessing today. I have written many times that the secret of economic growth is having more people work. For the last year or so, we have been adding more employees to an already strong workforce. The fact that we had over 600,000 new people looking for jobs who will eventually be hired supports the economy even more. As I have often mentioned, each new employee supports his or her family, corner drug store, and creates economic trickle down from each new job. The future economic growth is centered on having each employee work and each new job supporting so many more Americans. The news on Friday regarding the employment report could not have been more encouraging to the U.S. economy.

Next month, I will write a lengthy dissertation on the inverted bond yield which seems to be the one economic factor that is quoted by virtually everyone as a negative. Just to give you a highlight on that issue: don’t believe everything you read without understanding the why. At the current time, the bond yield is not inverted even though it is moving in that direction; however, it could be years before the actual inversion occurs. I will assert that the economic effect of the world is now constraining the upward moving of the long-term bond yields and the economic effect that is only positive for stocks. You will have to wait until next month to enjoy that interesting read – I know you can hardly wait.

Not that is has anything to do with economics, but I thought I would discuss a documentary you might enjoy. I graduated from college at a time when the Vietnam War was actually declining in importance. I was called up six times for the draft but was never taken. While never drafted into the military, I lived through the enormous upheaval that we had in this country with protests of the war. I was in college from 1967-1971 and saw the protests up close and personal. I lived through the assassinations of Martin Luther King and Robert Kennedy within three months of each other and I remember the riots that occurred as a result of those horrific events in the United States.

I came across a series on Netflix by Ken Burns called The Vietnam War. I guess it was originally a PBS series that is available on Netflix where you can watch one episode after the other. Even though it is over 15 hours long, I could not stop watching. If you do not feel complete outrage after watching this series or tear up at the end, you really just do not understand what you are watching.

If you didn’t realize that our government lied to us for all of these years, sending men to die in a war that could not possibly ever be won, then you do not understand the history. I think most people reading this blog might not even remember that time frame or the hypocrisy that was our government during these years. If you are interested in knowing the inside history of these volatile years, I would highly recommend that you devote a few days to watching this series from beginning to end. The last couple segments are the most interesting since they bring the story up to date, but you really have to see the pain and suffering of the initial episodes to understand the conclusion the series has come to in recent years.

Also, this month, we received a national recognition that made us proud. We were voted one of the top 300 RIA (Registered Investment Advisor) firms in the United States. I dare say, there are at least 300 RIA firms in Atlanta alone, so this means quite a lot to us. This also follows the two additional awards that we received over the last few years. For further details, please refer to the blog posting from last week.

I am often asked what distinguishes an RIA from a broker or adviser, such as banks and major brokerage houses. The difference is that we are required to be your fiduciary and they are not. We cannot sell you products in which we would benefit while they do. Given that they are in direct conflict of interest with your interest, by definition, it always amazes me that people use banks and large brokerage houses for investing. Since their financial interests are clearly not yours and while they are not your fiduciary, why one would ever invest with anyone other than an RIA makes zero sense to me.

In any case, we are certainly proud to have received three national recognitions for a company that I started 38 years ago, with the sole intention of simply paying my bills for the next 12 months. I believe the national recognition comes from really hard work from my partners and staff as well as the satisfaction of our clients. When your clients make money, your assets under management expand and your reputation improves. Again, we are very honored to have received these great recognitions over the last few years.

As we enter into the second half of the year, the economic landscape could not be brighter. Corporate earnings will be up significantly because of the higher economy and lower taxes. I cannot see interest rates increasing dramatically given that international bonds are significantly lower than the already high rates in the United States. And the economy just continues to get stronger with GDP likely to be up over 3% in the second quarter of 2018; I still feel very confident that we will reach our double-digit growth projection for 2018. Therefore, we have the trifecta of economic conditions that lead to higher stock prices: increasing earnings at an accelerating rate, interest rates that are low and not materially changing over time, and an economy that continues to grow at all levels.

Once again, we invite you to come visit us during our slower summer months, while we have time to catch up, discuss your goals and whatever financial concerns you may have.

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

Best Regards,
Joe Rollins

Friday, July 6, 2018

Rollins Financial Receives National Recognition

From the Desk of Robby Schultz

Since 1990, our job has always been to focus on our clients and make sure that their financial matters are handled quickly, efficiently, and professionally with their best interest always put first. Further, we believe that we are quite unique and bring a great deal of value in being able to combine our financial planning ideas with our accounting knowledge. In fact, we usually spend the “slow” summer months sending our collective Rollins Financial and Rollins & Van Lear staff to additional classes to make sure that all of us stay abreast of changes in both taxation and financial planning.

But, this year, the month of June was an exciting one for us with Rollins Financial receiving recognition from two independent national publications naming us to separate prestigious lists. What makes this even more interesting is that one list highlights us as a financial planning firm and the other as a CPA firm with financial planning. These lists truly show the combination of Rollins Financial and Rollins & Van Lear being noteworthy indeed.

“Imagine your accountant and financial planner, working in harmony. Just for you.”

2018 FT 300 Top RIA Firms

In late June, Rollins Financial was named to the 2018 edition of the Financial Times 300 Top Registered Investment Advisers. The list recognizes top independent Registered Investment Advisers (RIA) firms from across the U.S.

This is the fifth annual FT 300 list, produced independently by the Financial Times in collaboration with Ignites Research, a subsidiary of the FT that provides business intelligence on the asset management industry.

RIA firms applied for consideration, having met a minimum set of criteria. Applicants were then graded on six factors: assets under management (AUM); AUM growth rate; years in existence; advanced industry credentials of the firm’s advisers; online accessibility; and compliance records. There are no fees or other considerations required of RIAs that apply for the FT 300.

The final FT 300 represents an impressive cohort of elite RIA firms, as the “average” practice in this year’s list has been in existence for over 22 years and manages $4 billion in assets. The FT 300 Top RIAs hail from 38 states and Washington, D.C.

AT 2018 Wealth Magnet

In addition to the above recognition, Rollins Financial, Inc. was also named for the second year in a row to the Accounting Today (AT) annual ranking of the leading CPA financial planners by assets under management – 2018 Wealth Magnets: The Top 150 CPA Firms by AUM (Assets Under Management).

For the 12th annual ranking of CPA firms by assets under management, AT received submissions from over 200 firms. Such a large number of firms means, among other things, wide diversity in practice structure and in the information submitted.

As always, Joe, Danielle, Eddie, and I invite you to come meet with us. With the “slow” summer months, we certainly have time to sit down with you (or a friend or family member) and discuss the stock market, investing or any other subject you would like. Please call our offices and set up a convenient time.

All the best,
Robby Schultz

Tuesday, June 5, 2018

I Bet You Cannot Get 5/10 Right of the Following Questions - Book Review

From the Desk of Joe Rollins

1. How many of the world’s 1-year-old children today have been vaccinated against some disease?
A: 20 percent B: 50 percent C: 80 percent

2. In all low-income countries across the world today, how many girls finish primary school?
A: 20 percent B: 40 percent C: 60 percent

3. In the last 20 years, the proportion of the world’s population living in extreme poverty has…
A: almost doubled B: remained more or less the same C: almost halved

4. What is the life expectancy of the world today?
A: 50 years B: 60 years C: 70 years

5. There are 2 billion children in the world today, aged 0 to 15 years old. How many children will there be in the year 2100, according to the United Nations?
A: 4 billion B: 3 billion C: 2 billion

6. The UN predicts that by 2100 the world’s population will have increased by another 4 billion people. What is the main reason?
A: There will be more children (age below 15) B: There will be more adults (age 15 to 74) C: There will be more very old people (age 75 and older)

7. How did the number of deaths per year from natural disasters change over the last 100 years?
A: More than doubled B: Remained about the same C: Decreased to less than half

8. Worldwide, 30-year-old men have spent 10 years in school on average. How many years have women of the same age spent in school?
A: 9 years B: 6 years C: 3 years

9. In 1996, tigers, giant pandas, and black rhinos were all listed as endangered. How many of these three species are more critically endangered today?
A: Two of them B: One of them C: None of them

10. How many people in the world have some access to electricity?
A: 20 percent B: 50 percent C: 80 percent

To refrain from too much suspense, at the end of this posting, I will reveal the answers to the questions above. However, I do want you to attempt them as they contain some very important lessons to be learned regarding the world we live in today. The answers are important in understanding the economic concept.

Recently, I read that Bill Gates recommended five books for summer reading. Over the Memorial Day weekend, I completed two of the five and am committed to reading the rest. If Bill Gates thinks they are important, then there is no question that I should believe they are important as well. The first book, Factfulness by Hans Rosling, contains the basis of the questions above. Professor Rosling spent his entire lifetime studying the facts behind the above questions. His research consisted of a plethora of resources including actually visiting the mentioned countries and personally participating in their workforces. Interestingly, Professor Rosling passed away before the book was published. Through its fascinating economic perspectives and concepts, this read brings to light many of the misconceptions we have regarding the world we know today.

As I must always do, I will review the stock market for the month of May 2018. This year has basically been breakeven, from the beginning to the end, but it looks like May might be the start of a much better year. For the month of May, the Standard & Poor’s Index of 500 Stocks was up 2.4 %. For the one-year period, it was up 14.4 %. The Dow Jones Industrial average was up 1.4 % for the month of May and up 18.9 % for the one-year period, The NASDAQ Composite Index was up 5.5 % for the month of May and up 21.3 % for the one-year period then ended. So that you have a basis of comparison, the Barclay’s Aggregate Bond Index was up 0.6 % for the month of May and down 0.7 % for the one-year period ended May 31, 2018. We did not learn a whole lot more than we already knew during the month of May. The economy continued to display its strength and exactly how good earnings are. Both components are positive signs for the future given that a good economy and increased earnings lead to higher stock prices. Interestingly, we went through several geopolitical events during the month of May that kept the stock market volatile. I wish people could focus on economics and ignore headlines. At the end of the day, nothing actually happened on the geopolitical level that should have any effect on future stock prices, other than war.

However, it was interesting to note that interest rates actually went down during the month, which was the first time this has happened this year. We have had a very large increase in interest rates during 2018. At the end of 2017, the 10-year Treasury Bond was at 2.4%. Compare that to 2.83% at May 31, 2018. While it is likely that higher interest rates will in fact dampen stock market performances, the 10-year Treasury Bond will need to be closer to 4.5% than its current level of 2.83%. I think it will be a very long time before that starts to happen.

I get so sick of hearing uninformed people on TV say that investors would be stupid to be anywhere other than in index funds. Unfortunately, that just illustrates how little they know about investing. This year, actively managed mutual funds are substantially better than passive funds. In fact, they are so much better that the returns are more than double what the index has earned this year. If anyone realistically believes that a passively managed index can beat a skilled stock picker with a full staff of research analysts then they are quite naive about investing.

Every now and again, we have clients say that they would prefer to be just invested in passive investments. It is true that only 10% of the mutual funds will outperform an index over time, however that is a very large number of actively managed funds. Today, there are roughly 6,000 publicly traded mutual funds. Of those funds, 10% would be over 600 funds that outperform the indexes; we only invest in roughly 50 of the best. Yes, I would expect that actively traded mutual funds would outperform the indexes for years to come.

One of the things we did learn during the month of May was that the unemployment rate is now at 3.8%. The unemployment rate has not been this low since April of 2000. I know it seems like that was just yesterday; it is hard to believe that was actually 18 years ago. If you remember April 2000, that was the peak of the NASDAQ in the middle of the Dot-com explosion. After that peak, the NASDAQ Composite dropped close to 70%. Fortunately, with earnings accelerating and interest rates still moderately low, I do not contemplate anything like that headed our way.

Josh, 23 & Ava, 7

Ava's 7th Birthday Party

Birthday dog CiCi

For the month of May, virtually all of the international funds performed poorly due to a strengthening dollar. One of the economic concepts that keeps interest rates intact is that the interest rates in the United States are already higher than they are virtually anywhere else in the world. A strengthening dollar dramatically impacts the economics of Third World Countries and thus emerging market funds. As mentioned, the 10-year U.S. Treasury Bond is at 2.83% compared to the German 10-year bond rate at 0.378% and the Japanese 10-year bond rate at 0.038%. As you can tell, the U.S. rates are dramatically higher than the other two large economies, and this differential will prevent the U.S. Federal Reserve from aggressively increasing interest rates. If they were to do so, it would certainly strengthen the U.S. dollar, but would also hurt the U.S. economy and corporate earnings. Given the constraint on their ability to increase interest rates, it would not surprise me to see fewer rate increases by the Federal Reserve than what is currently predicted by too many market forecasters.

One of the important discussions that always needs to be had about the growth of future earnings is the stability and growing nature of the economy. Every day, it seems like we get better and better news on that subject. During the month, the Federal Reserve of New York changed its estimate of the GDP for the second quarter to approximately 3% from the previously forecasted 2.3%. Typically for the first quarter, GDP is held down by bad weather and conditions where people just cannot work for whatever reason. If the Federal Reserve is correct and it is a 3% quarter, that would be extremely bullish for the stock market going forward.

One of the best indicators of actual GDP is published by the Federal Reserve Bank of Atlanta, which is a local voting member of the Federal Reserve. On June 1, 2018, they projected that the growth of the GDP would be 4.8% for the second quarter of 2018! A number like 4.8% has not been seen in the U.S. in decades. If this number were correct, it would be a watershed for the economy going forward. Even I am not so optimistic to believe that this number is correct, but if there is a reading anywhere in the 3.5% to 4% range, it would clearly be a major catalyst for higher earnings in the future.

I will not go into a long discussion behind the reasons for the previously mentioned questions and the correct answers. I will leave you to read the book for yourself, where the answers are fully explained. Like most people, the majority of my answers were incorrect. In fact, the first question literally blew me away since I had no idea that vaccinations were so widespread in the world today.

According to the World Health Organization, 88% of one-year old children in the world today are vaccinated against some disease. The authors of the book rounded down to 80%, in their words, “…to avoid overstating progress.” That number is almost unbelievable. So for many years the World Health Organization knew that while they could not cure the diseases of the world, they could help prevent them. Now that 88% of the one-year-old children are being vaccinated, the world is making a huge attempt to tackle the issue of early childhood deaths. The long-term effect will be healthier children who are able to progress through the school system and eventually become contributing members of society. Likewise, the answer to the question regarding schooling was quite surprising. Worldwide, women age 25 to 34 have an average school career of 9.09 years and men of the same age have an average school career of 10.21 years. I am absolutely convinced that the facts in this book will change your thoughts on whether women worldwide face education discrimination or not. These facts say they do not.

This book left quite an impression on me because of its optimistic view for our world’s future as compared to the negative news reports we read on a daily basis. If you review the answers to the above questions, it is a conundrum trying to make sense of what the news is telling us today versus actual facts. Thus, the purpose of this book is to correct the record and illustrate that things are in fact moving in the right direction, contrary to popular belief.

In the United States, the economy continues to be strong, and quite frankly, the strength of the U.S. economy pulls the entire world to a higher economic standard. In China, the middle-class population has become very large compared to where it was 30 years ago. The advancement of the middle class in China has much to do with the United States buying goods and services from their Chinese manufacturers. As you can see, the strength of the U.S. economy means more U.S. goods. More Chinese goods are imported into this country and the end result is a higher standard of living for the Chinese that produce these goods.

The book also goes into great detail explaining the progress that Africa is making in the advancements for the future. Most people still consider Africa to be a Third World Country, but that is clearly changing. One of the interesting aspects of what wealth can do to better a society is demonstrated by the Bill & Melinda Gates Foundation. This private foundation has set out to vaccinate the entire continent of Africa. We are not talking about one small town or village, but the entire continent. In order to accomplish that goal, Mr. and Mrs. Gates had to invent a refrigeration system for a large part of the world where electricity is not readily available. Using his innovative mind, Bill Gates invented a refrigeration system that can be shipped and work solely off solar power long enough to keep the vaccinations fresh for the people of Africa.

From Harvard student dropout to one of the richest people in the world, Bill Gates strives to use his wealth for philanthropic purposes, making society better for the children of tomorrow. We read and hear so much about the negative aspects of wealth, but you do not have to look far to see the good that Bill Gates is doing for society.

I am sure that many of you are thinking that the answers to the questions above could not possibly be correct. While I could quote the references, the author’s explanation is much more eloquent and thoroughly researched. Having read the book from cover to cover, I can assure you that the facts fully support the answers above. What is so interesting to me is the overwhelming perception held by Americans that the world’s lifestyles are deteriorating. These assumptions are not supported by the facts. In fact, after reading this book you will realize that there is a lot going on in the world that is positive and efforts are being made to help people escape the lifecycle of poverty.

I believe people become skeptical of the stock market because they watch the nightly news. During a meeting with a client the other day, he wondered how, with all of the negative news reported, the stock market could actually go up. First and foremost, while the way one perceives life does affect stock market performance, it is a long way from being the most important factor. Elements that make the stock market go up are low interest rates, high earnings and a good economy. At the current time, we have all three of those components working for the benefit of higher stock prices. However, seeing all of the negative publication headlines makes me wonder what affect it must have on the attitudes of many Americans. I recommend that you read this book, especially if you are seeking a positive outlook on the economy around the world today.

Today’s financial headlines are all screaming for a major market decline. However, I feel just the opposite. At the current time, I believe that the biggest risk to most investors is that they are willfully underinvested. I speak with clients everyday that have kept a substantial amount of money in cash. Leaving their money in cash means they will earn virtually zero. Textbook investing of prior years’ insisted retirees should have a large percentage of assets in bonds. That may have made sense years ago when life expectancies were short and inflation was mild, but given the negative performance of bonds year-to-date, investing in this manner is likely to prevent you from enjoying the full potential of a well-deserved retirement.

One of the major aspects of planning for your retirement is to discuss not only your investment goals, but the process it will take to get you there. We encourage you to sit down and have a conversation with us regarding your thoughts on investing. Our office is open year-round and we look forward to meeting with you at your convenience.

Answers: (If you got more than 50%, you are the exception.)
1. C 2. C 3. C 4. C 5. C 6. B 7. C 8. A 9. C 10. C

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

Best Regards,
Joe Rollins

Thursday, May 24, 2018

Remember and Honor - Happy Memorial Day!

In observance of Memorial Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, May 28th. Please note that all major U.S. stock exchanges will also be closed in honor of those who died in service for our country.

Our office will re-open for business on Tuesday, May 29th at 8:30 a.m. If you require immediate assistance on Monday, please do not hesitate to contact our staff via email:

Joe Rollins at
Robby Schultz at
Eddie Wilcox at

Please be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Tuesday, May 22, 2018

Georgia HEART Hospital Program

In the past, we have written about the Georgia Qualified Education Expense Tax Credit (Georgia GOAL) and its potential benefits to you as a Georgia taxpayer. We are still advocates of the credit and believe that, despite its reduced allocation to taxpayers due to its popularity, many of our clients will continue to benefit from it. Today, we want to make you aware of the Georgia HEART tax credit. This may be the first time you are learning about this credit, but just like Georgia GOAL, we expect this credit to become very popular very fast due to the enhanced legislation that was just passed to become effective July 1, 2018.

First, a quick note for our clients who are fortunate enough to not incur Georgia income taxes due to the retirement exclusion, living elsewhere, or otherwise: this is a direct Georgia tax offset. If you have zero Georgia tax liability, this will not benefit you, because, well, you’re already at zero and you can’t beat that! However, keep reading because even if you don’t need it, you likely know someone that this could help. So here we go….

In 2016, the Georgia General Assembly passed legislation that was signed into law by Governor Deal to award Georgia income tax credits to individuals and corporate taxpayers who contribute to qualified rural hospital organizations (“RHOs”) located in Georgia beginning January 1, 2017. This legislation aims to aid with the financial crisis that many of Georgia’s RHOs face due to demographic, economic and health care industry challenges. The Georgia HEART Hospital Program is helping rural and critical access hospitals take advantage of this opportunity to increase their funding and consequently significantly strengthen their ability to provide for the health care needs of thousands of Georgians.

How can this help you? As a Georgia taxpayer, if you contribute to a Georgia RHO (on the approved and qualified list referenced later) you will receive a direct offset to your Georgia tax liability. Dollar for dollar. And let’s not forget about the charitable deduction you’ll receive on your federal tax return. While you cannot double dip and that charitable deduction is added back for Georgia purposes, the bottom line should still be a net positive benefit to you, especially given the federal tax reform legislation that was passed for 2018. Let me walk you through some of the additional details that are to be expected when government legislation is involved.

During 2017, taxpayers contributed to this program (within certain prescribed limitations) and received a 90% credit against their Georgia tax for their contribution as well as a federal charitable deduction for their full contribution. In 2017, this was effective for some taxpayers because it shifted an itemized state income tax deduction to a charitable deduction and helped to fight the alternative minimum tax (“AMT”) battle. Since the Trump administration passed the 2017 Tax Cuts and Jobs Act, AMT is likely no longer an issue for many taxpayers who were previously affected. But, the tax reform severely limited the state and local taxes (“SALT”) deduction. So, while combating AMT may no longer be an issue, fighting a limited SALT deduction is one of the newest benefits of participating in this program in 2018.

And, effective, July 1, 2018, this legislation has been enhanced to provide an even larger benefit to taxpayers. During the first six months of the year (January 1 – June 30) taxpayers may participate in this program with the following limitations on their HEART RHO contributions:
  • In the case of a single individual or a head of household,a 100% Georgia income tax credit for contributions to RHOs, up to a limit of $5,000
  • In the case of a married couple filing a joint return, a 100% Georgia income tax credit for contributions to RHOs, up to a limit of $10,000
  • An individual who is a member of a limited liability company, shareholder of an "S" Corporation, or partner in a partnership (pass-through entities) is allowed a 100% Georgia income tax credit for up to $10,000 of the amount they contribute to an RHO, so long as they would have paid Georgia income tax in that amount on their share of taxable income from the pass-through entity.
This sounds very much like the Georgia GOAL tax credit, except with higher individual limits. However, due to the popularity of GOAL, a taxpayer will typically no longer receive approval for a maximum tax credit. Because the HEART credit is still new, from 2018 through 2021, Georgia taxpayers can access $60 million of RHO tax credits each year, with each qualified RHO having access to $4 million of tax credits (until the total annual $60 million cap is met). And, while you must still be pre-approved for your individual credit, you can take advantage of this in 2018 to use in 2018. In other words, you can do this now for a 2018 tax benefit.

Bottom line, this is all really good news for those of you that have Georgia tax liability and would likely otherwise be donating to a charitable organization. As if the 100% tax offset (up from 90% in 2017) is not enough, it gets even better. After June 30th of each year, for as long as a portion of the $60 million annual cap on RHO tax credits is available, individual taxpayers may make unlimited contributions to RHOs for a corresponding 100% Georgia income tax credit to offset their Georgia income tax liability. Yes, you read that right, Unlimited contributions to RHOs for a corresponding 100% Georgia income tax credit! As long as the annual cap has not been reached, you can request to be approved to contribute to an RHO versus paying the Georgia Department of Revenue.

A very brief example: let’s assume you are married filing jointly and your Georgia tax liability is close to $25,000 after all other deductions, exemptions, and credits. This legislation allows you to donate $10,000 to a qualified RHO (at some point between January and June) and receive a $10,000 corresponding tax credit on your Georgia tax returns. Then, provided the annual caps have not been reached, you could donate an additional $15,000 sometime after June 30th and receive an additional corresponding $15,000 tax credit on your Georgia tax returns. So, you effectively would not need to withhold Georgia taxes from your paycheck or make Georgia estimates. You could direct your funds to this program instead. (Yes, you could also just wait and make a one-time contribution of $25,000 after June 30th but you’d have to keep your fingers crossed that the annual cap had not been met.)

And please keep in mind, that you will also receive a federal charitable deduction for this. So, that SALT deduction limit that was referenced above, this is where that comes into play. Anyone who itemizes on their tax return previously received a deduction for these taxes – this included state income taxes, real estate taxes, personal property taxes, etc. This deduction has been capped at $10,000 beginning with 2018. For many of you, this will barely cover your real estate taxes. What this program allows you to do is to shift a potentially limited state income tax deduction to an allowable charitable deduction. So, that the $25,000 (from our example) that you were having withheld from your paycheck to cover your Georgia taxes will likely no longer provide you with any type of federal benefit. However, if you made an RHO contribution for that amount, instead of having it withheld from your paycheck, you have still expended the exact same amount of money, but you would still receive that federal benefit in the form of a charitable deduction. And your money would be going to an RHO instead of the Georgia DOR.

Presently, there are 58 qualified RHOs, 52 of which are participating in Georgia HEART. View a list of participating HEART hospitals. Also important to note: on or before May 15th of each year through June 30th, individual taxpayers will be able to make a HEART appointment to authorize Georgia HEART to submit their post-June 30th tax credit pre-approval forms with the DOR. This is the unlimited one. You will find a lot more information there too!

We have reviewed some specific illustrative examples of how diverting your Georgia tax withholding to this program could potentially benefit a higher income taxpayer with Georgia tax liability whose SALT deduction is severely limited under the new federal tax laws. The tax benefits are definitely worth a closer look and vary based on your income tax bracket. But in most cases, we cannot find a downside! Since all of our clients have unique income tax situations, if interested, we would be happy to assist with some individual tax calculations. Please do not hesitate to contact us with additional questions as this is something that could be beneficial to both you and many Georgia hospitals in financial crisis. We look forward to hearing from you.

Best Regards,
Danielle Van Lear

Wednesday, May 16, 2018

"I have become my father!", "Taxes, tariffs, trade and tweets" and more...

From the Desk of Joe Rollins

Financially, the month of April was basically a flat month, but given the four T’s above (taxes, tariffs, trades and tweets), a flat month is actually encouraging. Every night before I go to sleep, I have to walk through the house turning off numerous lights, even in rooms that I am positive have not been used in weeks. It makes me feel like I have become my father in many respects. He would literally go out of his mind if he saw lights on in an unoccupied room. I guess you are beginning to wonder exactly how my father fits into this conversation of the stock market and the economy, but I promise to explain shortly.

Before I move onto these more interesting topics, I have to cover the performance of the stock market for April 2018. For the month of April, the Standard and Poor’s Index of 500 stocks was up .4%. Year-to-date, that index is down .4% and for the one-year period it is up 13.3%. For the month of April, the NASDAQ Composite edged out a small gain of .1%. The NASDAQ Composite is up 2.7% for 2018 and up 18.1% for the one-year period ended April 30, 2018. The Dow Jones Industrial Average was up .3% during April and is down 1.6% for 2018. Like the NASDAQ Composite, the Dow Jones is up a sterling 18.1% for the one-year period ended April 30, 2018. For basis of comparison, the Barclays Aggregate Bond Index was down a somewhat surprising .8% for the month of April and is down 2.3% for 2018. For the one-year period ended, the bond index was down .6%. As is easily reasoned from these numbers, of all the indexes mentioned above, the one that the public perceives as being the safest (the bond index) was down substantially more than any of the indexes deemed by the public as more speculative.

Josh graduated from Auburn last weekend with a Masters in Accountancy.
He is the cool one in the sunglasses!

I very rarely write about my father or exactly what his influence had on me and my financial thinking. For those of you that do not know, my father was a Methodist minister all of his adult life. Even though he graduated from the University of Tennessee with a Master’s Degree in electrical engineering, he was never really an engineer. Since he graduated in the mid-1930s during the Depression, there were no available jobs for his skill set. He taught high school math for a few years before entering into ministry on a full-time basis. Due to his educational background, he was offered many lucrative job opportunities over his lifetime, but he never left the ministry for his entire career, working in rural churches in Southwest Virginia and East Tennessee.

The most interesting thing about my father was his level of intelligence and ability to do virtually anything. I never really saw him undertake a task that he did not accomplish. At one rural church, he was actually a general contractor and built the sanctuary himself. He went through a lifetime of small, insignificant cities and churches, yet never lost his enthusiasm for his job. At the end of his career, he was relocated to East Ridge, Tennessee, which was essentially an all-white community at that time. As the churches in the area integrated, the outrage of the public took a toll on him and he died at the early age of 67 from the stress.

How all of this relates to my philosophy regarding economics and the economy is quite simple. My father was the most optimistic person that I have ever met. Even at the worst of times, he could see the positive around it. It wasn’t that he was Pollyanna about things that needed changing; he was the person who made the changes. He did not wait for the public to change, he changed it for them. He was definitely a leader.

It wasn’t that my father was a strict disciplinarian, he didn’t really need to be to get his point across. He was not around much when I was young since he had meetings at the church virtually every night of the week. In fact, he never saw me play basketball until college, when I played for the University of Tennessee. However, there was never any doubt that when he told you to do something, you did it. And there was never any doubt that he would take the most optimistic viewpoint on every subject.

As I sit around today and read the financial news with all the negative headlines, I often reflect back on my father’s attitude. Why on earth are these people electing to be so negative when in fact the economic news and the news on the financial markets could not possibly be better? There must be some underlying distrust of the facts when they could not be any clearer to being a positive framework for higher earnings and a higher stock market. During the month of April, we had a lot of conversation regarding the four T’s: taxes, tariffs, trade and tweets. Therefore, it became a roller coaster of large gains and large losses on the market but overwhelmingly the news was positive. Yet, somehow the financial press always made it seem negative.

For the first quarter of 2018, the GDP was first reported at 2.4%, which was considerably higher than it has been in recent first quarters and certainly higher than projected. Did you realize that more taxes have been collected by the U.S. government than during any time frame in history in April, even after the large tax cuts that were put into place in December 2017? Did you realize that for the first time ever it looks like the U.S. will be 100% energy independent and in fact, is beginning to export oil and natural gas to foreign economies? It looks like the first quarter earnings of the Fortune 500 largest companies will be up more than the projected 20%, closer to 30%. Corporate earnings projected for the rest of 2018 continue to look at 20% or better. Negative news – there is not much.

Recently, the congressional budget office has increased its GDP for the projected 2018 year. They have raised their projected GDP in the United States from 2% to 3.3% for 2018. They even increased GDP for 2019 to 2.4% from their previous projection of 1.5%. All of this can be attributed directly to the tax decrease in the United States. It did not get as much publicity as it should have, but yesterday North Korea released three long-term prisoners that they had used for political leverage. You do not need to be a rocket scientist to realize that North Korea is attempting to “make good” with the rest of the world so they can have the sanctions removed.

Last Friday, it was reported that the unemployment rate in the United States has fallen below 4%, which is the first time since 2000 that we have reached a sub four unemployment rate. It is also absolutely clear from the record that anyone who wants to work in America can get a job, there are just a lot of people who elect not to do so.

So, given all of the incredibly good news we see around us, I still stand by my year-end projection of a gain in the markets this year by double digits. Already in the month of May, markets have improved significantly and I would expect a bumpy ride, yet to end up positive by double digits at year-end.

No, I am not ignoring the negatives. As pointed out by one reader of my last financial blog posting, the congressional budget office is projecting a deficit next year of close to $984 billion. At the current time, the U.S. economy generates a GDP of roughly $22 trillion and the national debt is roughly $20 trillion. Therefore, if you have a few more years of huge U.S. deficits, then the amount of debt equal to the GDP would be roughly 100%.

There is no question that the Federal deficits are too high. Maybe there was a reason to run up a large deficit of $1.4 trillion in 2009 due to the financial collapse. However, the deficits continued to be high during the Obama administration. In 2010, 2011 and 2012, the deficits reached $1.3 trillion, $1.3 trillion and $1 trillion, respectively. In fact, during Obama’s entire presidency, the lowest that the deficit ever became was $438 billion. The only problem with the Obama deficits was that they were not increasing GDP (stuck at 2%) during the entire time. There could be an argument made that if you are increasing GDP, deficit spending may not be such a bad thing.

How is it that you can reduce tax rates yet increase revenues to the government? While it is not intuitive to think how that could even be possible, the Federal deficit is much more complex than your household budget. Increasing the number of people working and the number of people contributing to the tax base significantly increases the revenue to the government even though the tax rates are down. If you have not read it before, I will give you the analysis. Based on the CBO report itself, it forecasts that the GDP will increase by $6.1 trillion by the year 2027. This amount is all attributable to the tax cuts – make sure you understand that we are talking about a 30% increase in the current GDP due to the tax cuts alone. It also forecasts that due to the tax cuts, it will decrease revenue to the Treasury by $1.69 trillion in the same time frame, but also points out that GDP growth will increase by $1.1 trillion in new revenues over the same time frame. Even using the conservative analysis by the CBO, they are conceding that 65% of the tax cuts are already paid for by extra economic growth.

CiCi grows up!

I recall when Ronald Reagan came into office and made the bold statement that he could increase revenues to the Treasury by decreasing income tax rates, which would increase economic growth. At that time, virtually all trained economists portrayed Reagan as a senile old man. (Interestingly, Reagan and Trump were about the same age when they started their first term as President.) I am sure we have all heard of Reaganomics and the effect Reaganomics would have upon the U.S. economy. When Ronald Reagan came into the office in 1980, the Federal deficit was $74 billion. At its worst in 1986 during his years, the deficit rose to $221 billion. Please recall during the start of the Obama administration that Federal deficits exceeded $1 trillion for four straight years.

The problem during the Reagan administration was while they were able to increase revenue to the Treasury they were never able to control the expenditure side. Due to the massive increase in military installations and other programs during the Reagan administration, expenses climbed a great deal faster than revenues. Even though he proved his point in increased revenues, it was not much consolation because the deficits continued to grow. But what was the effect on the stock market when these tax rates were significantly reduced? From 1982 to 1989, the S&P 500 had the following returns: 1982: 22%, 1983:23%, 1984:6%, 1985:32%, 1986:19%, 1987:5% (year of the first major crash), 1988:17% and 1989:32%. If you do not see a direct link to lower taxes and a higher stock market then you are clearly missing the forest for the trees.

Therefore, there is no question that the deficits at some point will need to be controlled. However, the Obama administration tried to improve the economy by spending more money. The theory was that if the government pumped money into the economy, the economy would grow, and therefore revenues would be raised – clearly that did not happen. So, the question remains as to whether the Trump administration will be correct. Can they in fact decrease tax rates and increase the economy, as Ronald Reagan did in the 1980s? If in fact the GDP grows as much as anticipated, there is a high likelihood that the tax cuts would pay for themselves; and if we could freeze the deficits at the end of this eight-year cycle as a percentage of GDP, debt would have actually decreased. The problem with analyzing the deficit is that we often get bogged down in the absolute numbers. The only number that is consistently correct would be a percentage of the national debt divided by the GDP.

Realistically, there is absolutely no chance in the world that the Federal budget would ever be balanced by increasing revenues to the Treasury through higher rates. At the current time, when revenues are less than expenditures by $1 trillion, it is unrealistic to assume that you could drag another $1 trillion in revenues from the general public without creating severe economic effects. While it may be perfectly possible that we could stop the deficit from growing, there is little chance that we would ever raise enough money to pay this off.

Some may say that is a fairly negative statement, but it is true. The only way to get the overall deficit program under control would be to control government expenses. It is interesting that you hear politicians give long-winded and hollow speeches regarding the deficit, but almost never do they mention cutting expenditures. Until there is some control over Medicare, Social Security and discretionary expenses at the Federal government level, there will never be a solution to the deficits created in prior years.

There are many economists that indicate that the deficit should never be a problem in the U.S. economy. I guess they have a point because at any time the Federal government could print more money and use this newly minted money for purposes of retiring the deficit. However, those actions would be so draconic that hyperinflation would clearly be created. If you are ever interested in learning exactly what might happen if they tried this, read about what Germany did leading up to WWII, leaving them with an essentially worthless currency.

Neither of the solutions above are the answer to the deficit problem; the deficits must be stopped on an annualized basis by growing the economy to a point where future tax revenues will overwhelm the Federal expenditures, thus controlling the long-term deficit. In reality, if we could stop the growth of the deficit as a percentage of GDP, the economic rewards would be well worth the sacrifice.

In summary, it is clearly true at the current time that there are more positives than negatives for stock market investing. You cannot pick up the financial news without seeing some significant person forecasting a stock market decline of major proportions. Is it possible that the market could go down tomorrow? Of course, it is. In fact, you could have a 10% correction in the market at any time without warning. We have already had two 10% declines in the market since the beginning of 2018, yet we are up in line with my forecast as I write this posting.

I often hear that you should hedge against stock market declines and therefore protect the downside. There is absolutely no question that hedging can be an effective deterrent if you have some reason to fear a major decline. I often recall the famous saying by Peter Lynch when it comes to those matters, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.” And he followed that up with an even greater observation, “I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

Of course, I have to close with one more famous quote, but this one is by Warren Buffett, “…the only value of stock forecasters is to make fortune tellers look good.” My analysis of the economy, earnings and the overall market is good and I see nothing that has changed my forecast of double digit returns in 2018. Of course, everything we do can change on a daily basis given economic events, but at the current time I do not foresee that happening.

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

Best Regards,
Joe Rollins