Tuesday, September 10, 2019

Standing Ovation at Vanderbilt University

From the Desk of Joe Rollins

Since there was not a whole lot of news in the financial markets during the month of August, I thought I would tell you about the time I received a standing ovation at Vanderbilt University. I will not share the details yet, rather just force you to read all of this other important information before you get there, but I think that you will be entertained. There are very few times in your life when you could receive a standing ovation from 14,000 people in an arena and not be appreciative. I think you will see that the ovation was totally warranted.

I also want to cover some other areas in this posting that I find interesting and I hope you will too. I continue to marvel at the flood of misinformation that is available everywhere today. I am almost of the opinion that constitutes a conspiracy of fake news more to embarrass the President than to educate investors. I want to cover some items that I think are important and you should evaluate. I also want to discuss the investment quality of bonds at the current time with the extraordinarily low interest rates we are enjoying. All of this new and exciting information follows, but now I must cover the financial markets for the month of August 2019.

Ava and Josh with the Statue of Liberty

As most of you know the month of August is a slow trading time and historically one of the worst trading months of the year. The month of August 2019 really was uneventful for the most part. The Standard & Poor’s Index of 500 stocks was down 1.6% for August, but continues to be up 18.3% for the year 2019. I would like to point out that this S&P 500 index had been up an average of 13.4% for the last 10 years. The NASDAQ Composite was down 2.5% in August and up 20.9% for the year 2019 and averages 16.1% for the ten-year period. The Dow Jones Industrial Average was down 1.3% in August, up 15.1% for the year 2019, and up annually 13.6% for the last 10 years. The Barclay’s Aggregate Bond Index was actually positive in August, up 2.6%, for the year 2019 it is up 9.1% and it has average annual returns of 3.9% over the last ten-year period. As you can see, each of the major market indexes performed roughly 4 times the bond index over the last decade.

I watch the major financial television news every day and am often amused by either the lack of veracity or the distortion of what they are reporting. When the short-term yield inversion occurred recently, the commentators were almost breathless in their explanation. Never have I seen such hysterics over such a totally meaningless financial occurrence. While we talk about the rate inversion, what we are really talking about is when the two-year treasury interest rate exceeds the interest rate of the ten-year treasury. It is quite an unusual time we have now where we have a one-month treasury yielding 2% and basically a 30-year treasury yielding less than 2%. So basically, you could buy a bond for one-month and make 2%, or you could buy a bond for 30 years and make roughly 2%. Does that make any economic sense to anyone?

Think about it just for a second. If you believe, as I do, that inflation will average roughly 2% for the next generation, why would anyone buy a 30-year bond yielding basically the rate of inflation? By basic economics alone, that bond would generate in real dollars no gain to you for the next 3 decades. Couple that with the fact that currently there is over 13 trillion dollars in European and Asian government bonds that have a negative rate of return. Basically, in Germany you could buy a $10,000 treasury bond and at the end of 10-years they would return $9,800 to you. I am trying to illustrate the absurdity of the situation and question why any informed investor would make that choice.

As I have explained in these pages before, a great deal of why the U.S. has such low interest rates is that the rest of the world is actually lower. If all you could get in Germany was a negative rate of return, you would certainly be better off invested in the United States where you would get some rate of positive return rather than negative. As the money rushes from around the world to buy U.S. treasuries, of course it deflates their currencies and increases the U.S. dollar. While many Presidents exploit the advantages of a strong dollar, in fact, economically it is not desirable. Since exports are overpriced and imports are underpriced, a high dollar actually leads to negative sales in the United States, which is not a good thing.

I read an interesting article that seemed to make a lot of sense in these crazy economic times about interest rates. Since 1976 there have been five significant yield inversion periods and in each case a recession followed. As is true in so many cases regarding financial matters, so-called experts quote the past to explain the action. I almost laugh out loud when I hear commentators quote on major news programs what happened in 1937 as compared to today. Surely no informed commentator would quote a period of time during the Great Depression as a comparison to the economic explosion we are enjoying today, but I digress.

I reiterate often in these postings that you cannot evaluate an economic event unless you understand everything that is going on around it. So why would five previous rate inversions be informative information in determining what might happen today? The reason is clearly documented by history. As quoted in these articles, during those five previous historic periods there was a spike in oil prices that drove up the price of crude oil by nearly double. As you can clearly imagine, if you doubled the price of oil over a relatively short period of time, the fear of inflation would be paramount. Oil impacts nearly everything in our lives including utilities, cost of transportation and the cost of goods. The doubling of oil prices clearly would lead to higher inflation.

The Federal Reserve has basically two mandates that it must adhere to. One is that it must control the rate of inflation and secondly, it must try to maximize full employment in the United States. As the price of oil doubled, the Federal Reserve would, by necessity, have to increase interest rates to slow the growth of inflation. So, in each of these five previous times, what you saw was an increase in interest rates to slow the economy which almost assuredly had more to do with the recession than the economy itself. If you compare that time to where we are today, it is clear to see that the financial circumstances are not similar. In our case today, the Federal Reserve is clearly trending with lower interest rates, not higher, and more importantly the price of oil has declined dramatically in recent years from previous levels. So, while the inverted bond yield might be informative to you, it clearly does not test the current economic circumstances. What we have today is dramatically different than we have had in previous bond inversions and, therefore, it makes no sense to assume a recession would follow based upon this economic indicator.

However, that did not stop the financial news from anxiously repeating this multiple times a day. If I’ve read one article about the upcoming recession, I’ve read them all. In fact, I noticed the major financial publications picking up on this projection, including major headlines reporting how you invest in the upcoming recession. What recession?

Let me give you an example of a very well-known financial person who, in my opinion, is a reporter of fake news. Ray Dalio is one of the most famous hedge fund managers in the United States, and it is reported that his personal net worth is somewhere in the $20 billion range. That is not chicken feed, even among rich people. While well respected as one of the best hedge fund operators, is he really trying to project financial activity, or is he a keeper of fake news? During a strong economy in February 2018, Ray Dalio caught everyone off-guard when he said that there was a 70% chance for a recession prior to the election in 2020. Since the call was greater than 50%, he was basically saying there was more likelihood than not that a recession would occur over the intervening 20 months.

Lo and behold, one year later in February 2019, Ray Dalio reduced his forecast of recession prior to the 2020 elections to 35%, and then in August of 2019 increased this prediction to 40%. It was unbelievable the amount of words that were spilled on national TV regarding these projections. As I watched commentators almost foaming at the mouth to explain the upcoming recession, I could not help but to reflect that even if Dalio was correct that there was a 40% risk of recession before 2020, did it not mean there was a 60% chance that there would not be a recession? It just never occurred to these commentators to report the inverse. As I am reminded by many media clients that I represent, “if it bleeds, it leads” I guess I should not have suspected otherwise. However, it is still unfortunate that investors are not given both sides of the argument.

I had a call last week with a client who indicated he was having trouble sleeping at night because he felt his portfolio was not performing well so he wanted to move to bonds. This statement caught me somewhat off-guard given that not only was it inaccurate, but clearly the client had not been observant of the financial markets. In the first part of September, the S&P 500 index is trading up to almost 20% and is 2% from the all-time highs. How anyone, for any reason, could believe that we are having a bad year in 2019 is mindboggling.

Reid and Caroline Schultz at sunset

As I continued to explore this conversation with the client, I tried to point out that we are in a time of historically low interest rates at a time when the financial economy is quite strong. I pointed out that the 30-year treasury is now trading at the lowest level it has ever traded at in the history of American finance. While this rate may stay low for a while, more likely than not, the next move on the treasury rate will be higher. If you are not aware how bonds trade, when the interest rates go up, the bonds go down in value which is not a good thing.

I also pointed out that the dividend yield on the S&P 500 today is almost 2% while the ten-year treasury yields 1.5%. It is rare indeed when the dividend yield of stocks is greater than the highest treasury rate quoted. Basically, that means that from dividends you can make more with the 500 index than you can make with a ten-year treasury. If you go about the calculation in a more basic manner, the S&P is currently valued at 18 times the projected 2019 profits and if you use the inverse of the price/earnings ratio, that implies a growth rate of 5.5%. Would you rather have the potential growth rate at 5.5% or the ten-year treasury rate at 1.5%?

As I explained to the client, there is no question that stocks are volatile and they go up and down, but over time, as illustrated in the comparison above, stocks make three or four times the returns than bonds will ever return. Now that we are sitting on the lowest interest rates ever in the history of American finance, could we reasonably expect rates to fall further or might they go up? Contrary to popular opinion, bonds can, and in fact do, lose money. Just to give you a normal example, on the average the 30-year treasury should be yielding roughly 3% greater than the ten-year treasury. If the ten-year treasury today is at 1.5 then the 30-year treasury should be yielding 4.5%. The reason for this is quite obvious. Over a 30-year period you take substantially greater risk of inflation, earnings and the economy. While a ten-year period is long, a 30-year is a large portion of a person’s lifespan. As an example of exactly how great the risk is, if the 30-year treasury would move only from 2% to 3%, which it was yielding in the fall of 2018 (roughly one year ago today), the value of that 30-year treasury would fall by a stunning 20%.

Just to give you a quick example of the value of stocks compared to bonds around the world, just consider the following information. In the United States, the ten-year treasury yields 1.56% at this writing. The dividend rate on the stock market currently is 1.92%. In Germany, the ten-year treasury yields a negative 0.6% and the dividend rate on their stock market is 3.29%. In the United Kingdom, the yield on a ten-year government bond is 0.59%, while the dividend rate on their stock market is 5.13%. I am not sure how many words or times it takes to emphasize that, fundamentally, the potential for higher interest rates is more likely than not and therefore bonds constitute a significant risk portfolio.

I noticed over the weekend that there were numerous articles written about the future of Social Security and how it would impact your retirement. Throughout my lifetime we have been discussing that Social Security is clearly going to run out at some point and adjustments need to be made. Well, I find that assertion absolutely absurd since I am 100% positive that would never occur. Clearly the General Treasury would step in and make Social Security sound, but there is no reason for even having this discussion. I cannot help but think that this discussion is paramount only for political reasons and not by economic sense. I am not going to bore you with how easy it would be to correct Social Security for generations to come since that discussion even bores me. I can only tell you that many learned economists have expressed the opinion that the issues with Social Security could be solved over the time it takes to drink a cup of coffee at breakfast. However, politically no one will have that discussion.

I was thinking back to a political rally I went to in 2004. I was invited to the old Civic Center auditorium to hear then President George Bush speak about privatizing Social Security. His mother, Barbara Bush, was present as were other distinguished people whom I do not recall. Basically, the President’s contention was that if we were to privatize Social Security, allowing a portion of those funds to be invested in equities rather than treasury bonds, the long-term benefits to Social Security recipients would be huge and the effect would dramatically reduce the cost to the taxpayers.

Joe and Ava

The reaction to President Bush’s suggestion was preposterous. You saw one politician after another almost foaming at the mouth to describe how absurd that proposal actually was. None of them cited Chile and the effect privatizing had on their Social Security system, which essentially made it self-sustaining. All they could warn the public about was that Social Security should not be invested in equities. I never really hear anybody comment on that today, but are you not a tad bit interested in what the effect would be? What if your share of Social Security had been invested in an index, such as the S&P 500 over the last 15 years, when Bush first made the proposal? How would your Social Security dollars have grown during that 15-year period if you had done just as George Bush had said?

Of course, any time we discuss investing, larger investors bring up the period in 2008 when the S&P index was down 38%. They give you that example to scare you of the potential risk that occurs in investing. They never actually bother to point out that of the last 16 years the S&P 500 index has been up 14 of those years. It is a fact that there are more up than down years in investing.

Just to give you an example, over the last 15 years the S&P 500 index has averaged a positive 9% per year. During that same time frame, the Barclays Aggregate Bond Index has averaged less than half of that per year. I want to point out that the last 15 years includes the 2008 stock market downturn. So basically over this 15-year period, including the stock market correction, if you would have had your Social Security dollars invested in equities rather than in treasury bonds, your returns could have been greater than they are today. This is even more compounded by the fact that treasury yields are so low today that, in the history of these investments, your future Social Security dollars are getting even less returns than ever. I often wonder to myself exactly where the Social Security system would be if privatization would occur. I think the record is fairly obvious that everyone would be receiving more Social Security today if invested in equities rather than bonds. I also think it is fairly obvious that the long-term financial stability of the Social Security system would be greatly enhanced, but you are missing one of the most important components of Social Security that is never discussed.

If the Social Security system were ever privatized or turned over to other people to invest, the politicians would lose control. In fact, they would not be able to dictate the future of your retirement, nor could they threaten you or warn you regarding the repercussions of any other choice. The reason the Social Security system will never be privatized in America is due to the stupidity of Congress itself. In so many ways, so many times a day, you hear such extraordinarily bad economic judgment coming out of Congress that I hope we all know now to consider any type of news coming from them worthless. There is no question that the Social Security administration should invest in equities for the betterment of all retirees. It can be a slow process of investing 10% per year for 10 years and everyone would have the option to do so or not. There would not be an option to take the money out or to spend it; it would be exactly how it is today except the returns on those investments would quadruple. I guess it is so simple to understand that it defies imagination and cannot even be discussed by politicians.

Okay, so I have teased you about my standing ovation long enough, so here is the full story. When I was playing basketball at the University of Tennessee, everything was new and exciting to me. Once we played in the old field house at Auburn University; it was so cold that there was actual ice on our clothing after practice. Fortunately for everyone, that building eventually burned down. One of the most unusual games we ever played, and where I received my first standing ovation, was at Vanderbilt University. You have to realize that this was in 1968, when not much local basketball was carried on TV and the quality of play was not particularly good. When I played there were only white players in the SEC. As this changed, I recognized I did not have the skill set necessary to play the game and I retired to more exciting things like accounting and finance. My idea of fun is different than most.

The Memorial Gymnasium at Vanderbilt University is one of the more unique basketball venues for basketball. It was built in 1952 and has a seating capacity of roughly 14,000 people. Who would have ever thought that growing up in a small rural town in Tennessee would afford me the opportunity to receive a standing ovation at such a renowned basketball venue?

The gymnasium has one very interesting feature. For reasons unclear to me, approximately the first three rows of the stadium actually sit below the level of the court. And the most unusual feature of all is that the benches for the players are not along the side of the court as they are in most gymnasiums. The actual benches for the teams are located at the end of the floor, which makes it unusual given that it takes a considerable amount of time to get to them if timeout is called and you are on the opposite side of the court. I believe that configuration with the benches at the end of the court may be the only major gymnasium in the United States where it exists.

I should have known that we were immediately in trouble when we came out for our pregame practice. At the University of Tennessee, we had this very elaborate warmup that had people running around in all different directions, but ended the layup line with somebody dunking the basketball at the court. As would be the case, as we were warming up someone kicked the basketball and it rolled off the court. It was the only ball we had. Since the ball rolled into the student section, they continued to throw it back and forth, preventing us from warming up. Much to our chagrin, the gymnasium was already completely full. The actual ball finally tended up in the upper deck before it was recovered by security and returned to us. However, in the meantime we lost about half of our warmup time.

That year the University of Tennessee football team was scheduled to play in the Orange Bowl after Christmas, and I am relatively sure the Vanderbilt student section attending our basketball game had partaken in some holiday cheer prior to arrival. As we were warming up, very large oranges were thrown from the upper deck - exploding like bombs on the court. As you can readily imagine, our team was anxious to avoid the projectiles, but the mess it made on the floor was somewhat overwhelming. The effect fresh orange juice has on a slick hardwood floor can be a little scary and none of us wanted to slip and slide during the pregame warmups.

My claim to fame came halfway through the second quarter. I went up for a rebound in a heavily congested area and one of the Vanderbilt players hit me with an elbow. I went to the ground, stunned by the blow, but when I looked up the whole team was on the far end of the court and there I was all alone. I had put my hand over my mouth which became immediately covered in blood and I knew something was wrong, I just did not know exactly what or how bad.

Josh and Ava in Central Park

After losing consciousness for a second, I then realized that someone had called timeout and I was literally there all alone under the basket, with blood pouring out of my mouth and down my jersey. I began to head towards my teammates on our bench, which was of course on the exact opposite end of the court where I stood.

I looked around again to try and determine where I was and where I should be going and began walking rather gingerly across the length of the court in my blood-stained jersey with my hand over my injured upper lip which would soon require 6 stitches.

To my surprise, almost 14,000 people stood, giving me a standing ovation. Not having gained total consciousness, I was not able to fully grasp what was going on at the time but I have to admit the thunderous applause and roar of the crowd was surreal. What a glorious feeling to have a standing ovation such as this when you are only 19 years old. Only later did I consciously understand that the standing ovation was not for me, but rather for the guy that hit me. However, at that age you will take any acknowledgement you can get.

On that note, come 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

Friday, August 30, 2019

Happy Labor Day!

In observance of Labor Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, September 2nd. We will re-open for business on Tuesday, September 3rd at 8:30 a.m.

If you have any pressing matters that require immediate attention on Monday, please do not hesitate to contact any of our staff.

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Thursday, August 8, 2019

"Good judgement comes from experience, and a lot of that comes from bad judgement." - Will Rogers

From the Desk of Joe Rollins

The title of this blog has a lot of meaning to someone like me who has been in this business for over 40 years. So many of the decisions that we make here on a daily basis are not driven by the headlines or the heated conversations we hear on the nightly news. Many are based solely on the wisdom gained through experience (40 years in my case). You learn that many of the headlines have nothing to do with actually creating wealth, and more to do with influencing trading. We are investors, certainly not traders.

There was so much I wanted to discuss this month, but I had to completely rewrite the blog after the news at month’s end. July was an excellent month from an investment standpoint, but as the month closed, the news changed all of that, creating volatility and uncertainty. I often wonder who the trolls are that sit around their computers in the middle of the night trading futures and trying to influence true investors. I frequently watch as the news is reported, and the instant change in the futures by hundreds of points is baffling. Surely, these people have not had the time to evaluate the news in such a short period of time to reflect a true evaluation. I intend to discuss how these wild moves in valuation of the futures is not indicative of true economic performance.

Before I discuss all of those extraordinarily important and interesting topics, I have to cover the financial news for the month of July. Once again, the critics argued that the month of July would clearly be a slow moving and highly volatile time due to people being on vacation and not at their trading posts. The one thing that has proven to be absolutely true is that so much of the market movement is now on autopilot and not controlled by the traders. As an example, since the advent of passive investing, more and more investors only invest in indexes that are not affected by the wild movements of the traders. So, during the month of July, the indexes proved to be very resilient to volatility and continued to move higher.

Employee of 35 years, Mia Musciano-Howard's
twins Marti and Mitch (age 15) with Ava and Savvy, Ava's cousin

The Standard and Poor’s Index of 500 stocks was up 1.4% during July and sits on a sterling year-to-date increase of 20.2%. The one-year performance of that index is 8%. The NASDAQ Composite was up 2.2% during July and sits on a year-to-date gain of 24%. The one-year performance of the NASDAQ Composite is 7.8%. The Dow Jones Industrial Average was up 1.1% during July and is up an excellent 16.7% in 2019 and is up 8.2% for the one-year period ended July 31, 2019.

Barclays Aggregate Bond Index was up 0.3% in July, is up 6.3% in 2019 and is up 8.2% for the one-year period ended July 31, 2019. For the first time in recent memory, the Barclays Aggregate Bond Index actually had a higher yield than the S&P 500 for the one year period. This, of course, is due to the massive selloff in stocks in the 4th quarter of 2018. However, it is certainly not characteristic of the index, given the 10-year annualized returns of the S&P 500 is 14%, while the 10-year annualized returns on the Barclays Aggregate Bond Index is 3.7%. Certainly, over a short period of time bonds can actually outperform stocks, but over a longer time period the performance of bonds is not even close to the value of index returns. Bonds are at all-time highs, not good.

It was an interesting month from an investment standpoint. As expected, the Federal Reserve reduced their short-term interest rates by a quarter of 1% on the next to the last day of the month; but in the course of doing so, Federal Reserve Chairman Jerome Powell made an announcement that the interest rate was a “midcycle adjustment.” As those words left his mouth, the market sank hundreds of points - not for any particularly good reason, but just because the Federal Reserve did not guarantee additional rate cuts. Recognizing how silly that selloff was, the very next day the markets turned around and rallied up to and above the level of the selloff. Everything was looking extraordinarily positive since Federal Reserve rate cuts almost universally lead to higher stock prices.

However, at 3 o’clock in the afternoon, President Trump tweeted out that the United States would soon levy additional tariffs on China since China had failed to negotiate any form of trade relief. With that statement, the markets sold off dramatically and they continued to do so through the weekend. Just as it has done in the past, China immediately met the increased tariff by devaluing their currency, effectively making the tariff neutral. With that action, for reasons that defy good economic judgment, the market sold off even more.

Let us go back and review what exactly has happened to the markets since the President first announced new tariffs. The first tariffs were announced in January 2018 after the markets had a 20% gain in 2017. At this announcement, all of the economists and stock traders predicted total chaos and the market went down 10%. A few months later, the markets completely recovered that 10% loss and were having a sterling year through September of 2018 when, once again, the President announced a 10% tariff on additional Chinese goods. As we all know (and suffered through), the market went down an ugly 20% over a period of 90 days, but quickly recovered. You may even recall that in May of 2019 the market went down 6.6% when the President announced new tariffs on Chinese goods of 25%. However, during the month of July all of the major markets traded back up to their all-time highs so these declines were nothing more than movements to a market, leading to higher valuations. The tariffs have had zero real effect on the markets to date, and here we go again.

This is why I pointed out in the beginning that good judgement over time is so much more important than reacting to everyday news. What affects markets has nothing to do with tariffs or international news, but rather everything to do with recession. If you properly evaluate where the economy stands on a daily basis, you do not need to know any other news in order to determine which direction it is moving.

Back in January of 2018, when the first tariffs were proposed, economists everywhere warned of the dangers that these tariffs would bring to the U.S. economy. I vividly remember reading that there was absolutely no question that these tariffs would lead to more inflation in the United States. Which would also lead to a slower economy that would almost universally predict recession in the United States - people would be out of work, breadlines like those during the Great Depression would form, and pure chaos would overtake the U.S. economy. And what was the outcome in the 1.5 years since the tariff increase? Virtually no effect on the U.S. economy at all.

Savvy (age 16) and Ava

On Friday of last week, the Treasury announced that the increase in GDP for the second quarter of 2019 was at 2.1%. In fact, the report on the GDP was actually much better than the headline number indicated. While the GDP was down from the first quarter’s excellent growth of 3.1%, this quarter was hampered by a significant move down in the value of inventories, which if properly evaluated would have actually put the GDP growth at 3% again this quarter. Also, it indicated that personal consumption was higher, and we all know that the consumer controls 75% of the GDP anyway. And what about inflation one and a half years after the first tariff increase? Based upon this report, the Federal Reserve announced a 1.4% increase in inflation, well below the 2% level they desire. So basically, the economists that projected total chaos in the U.S. economy were clearly incorrect regarding growth and inflation. But what about employment, surely it was down?

For the month of July, employment continued to grow at a very healthy rate. The U.S. economy added 164,000 jobs and unemployment remained at 3.7%. Remember that unemployment here in the United States is at a 50-year low and even more importantly, the underemployment rate also fell to 7% during the month. This is the lowest level since December 2000, which was after the incredible boom in the dot-com era when the entire economy grew super-hot and beyond its abilities to sustain that growth. As you can see from the figures above, those so-called expert economists were absolutely wrong when they predicted (1) that the economy would fail, (2) inflation would soar, and (3) unemployment would be widespread, bringing the economy down. They are batting 0 for 3 and will be wrong again, as I am predicting in this posting.

One of the things that has always baffled me about the tariff debate is what exactly do we import out of China that is a necessity in our everyday life? The numbers alone are clearly compelling. U.S. exports are only 12% of the U.S. economy and therefore not a significant number that would dramatically affect the economy one way or the other. Imports are only 15% and therefore, once again the effect is only minimal. While the President always likes to say that the Chinese themselves are paying the tariffs, that is clearly not the case. It is the people purchasing the goods from China that are paying the tariff through an increase in cost. To a large degree, these costs have been neutralized by the Chinese decreasing the value of their currency, therefore keeping the cost at a low level. So net effect after currency adjustments, big fat zero.

However, the above does not actually illustrate the effect on consumers. For the most part, we only import things of low value from China. Sure, we import coffee makers, microwave ovens, etc. but these are not items necessary in everyday life. These are also items that can be imported from other countries such as, Indonesia, Vietnam, Mexico, etc. And did you know that China is not even the #1 importer of the United States? China has fallen to #3 with both Mexico and Canada importing more goods into the United States than China itself. The effect of the U.S. consumer having the ability to transfer those purchases to other countries certainly validates the concern that the President has. If an item becomes too expensive because it is imported out of China, the consumer will simply not purchase it. In fact, very few items could only be manufactured in China and not in other countries. As more and more companies move their manufacturing facilities out of China, the effect of the tariffs on final goods is significantly reduced. Since these items are not critical, the consumer does without.

But what exactly is it that we export to China? Semiconductors produced in the United States are produced nowhere else in the world. This technology drives virtually every component of our high-tech life. Even the Chinese smart phone manufacturers use chips that are produced in the United States. Are you under the assumption that China could do without semiconductors produced in the United States? That is impossible to assume. Yes semiconductors are assembled in Asia, but the software is all U.S. based, and critical.

I concur with the President’s assumption that China must be brought on board to comply with the world’s protection of technology. For many years, the Chinese have indicated that if you manufacture in China, then you must turn over your technology to them. That is clearly in violation of the rules of global commerce and the Chinese must be held to the same standard. While the actions of the President are extreme in some cases, it appears that they might in fact be working and I agree they are way past due. For decades, U.S. Presidents have ignored the effects that China has on the transfer of technology and we can no longer do so. While we can clearly do without toasters, blenders and microwaves, they cannot do without U.S. technology. By limiting what they buy, we will slow their economy a lot faster than just limiting how many blenders they actually produce.

So, we headed into 2019 with “fears” of corporate earnings crashing and burning, soaring interest rates and disastrous earnings. None of these predictions have taken place. After the announcement of the one quarter of 1% rate cut by the Federal Reserve, interest rates on ten-year treasury bonds didn’t rise, but actually fell. At the close of business at the end of July, the ten-year treasury was at 1.8%, which was the lowest level it had been since the beginning of 2017. These low interest rates will almost assuredly reinvigorate the housing market and the investing market. Both of these low interest rates are very good for the economy. As pointed out previously, employment remains extraordinarily strong and interest rates are low and the economy is stable. As we can see, the trifecta of components for higher stock prices is in place. None of us can forecast the future and none of us know exactly what will happen with this increased threat of tariffs, however, with history as your judge, you can see that the effect on the economy thus far has been very muted.

If we were to see a major reduction in earnings as we move forward, I would be concerned; however, the current projections actually show exactly the opposite. We were told that earnings would suffer a major decline in 2019 because of the tariffs. In fact, it looks like for the second quarter of 2019, earnings will have increased by 2.1%. While 2.1% is not a huge increase, you need to put into perspective that this is against all-time high earnings from the previous year. What is fascinating about the discussion of comparative earnings is that they are up against a quarter when the effect of the tax decrease was not even in play. The actual accounting for the lower end of corporate tax rates did not occur until the fourth quarter of 2018. Therefore, the accumulative effect of the comparison in earnings where apples equal apples and tax rates are low for both quarters will not occur until the fourth quarter of 2019. If the projections for fourth quarter earnings are correct, the year-over-year increase would be a staggering 23.6%. No one absolutely knows what will occur in the fourth quarter of 2019, but even if that percentage is wrong by a factor of one half, a 10% increase in earnings year-over-year cannot be anything other than a positive effect to the economy. Do not let the media confuse you on economic terms.

As I started this blog, I pointed out that experience brings knowledge. So much of the knowledge that we have today is because of mistakes we have made in the past. Hopefully, you learn daily by prior mistakes. I am often amused when I read about people nowadays who portray themselves as being financial consultants. I read that life insurance agents, stockbrokers and young kids right out of college consider themselves to be financial analysts and consultants. I would argue that you can learn to be a stockbroker in a year or two, but you cannot learn to be a financial consultant in 20. It takes many years of analyzing data and seeing the effect of the markets to really know what to expect. After 40 years of actually investing money for clients, maybe we have seen more and done more than the average financial advisor and therefore maybe we do it better. That is my story and I am sticking to it.

I fully expect that for the rest of the summer and the first month of fall that we will see high volatility. There will be days the market will move dramatically one way or another without rhyme or reason. The reason I think we are going to get this volatility is that the pros have not made much money in 2019. The market has vastly outperformed most everyone’s projections and therefore the pros have underperformed. The only way to make money is with volatility. They do not care which way the markets move; they just make them move. While I think this volatility will be heightened as the year progresses, I do not anticipate that it has any long-term effects and the year will still end up being quite satisfactory as we projected.

Joe and Ava enjoying some time in the ocean

At the beginning of this year, based upon the analysis that I prepared at the end of 2018, I projected that the S&P 500 would reach a level of 3,000 at the end of 2019. Since we have already exceeded that level of 3,000, I would say that that projection needs to be updated. Based upon all of the information I have now, it would appear to me that the S&P should end the year at 3,100 and therefore, even though we should suffer high periods of volatility, the trend is clearly up and not down.

The sad news about tariffs is that only one man, the President, controls them, He can, at any time, make them go away with one signature. So politics then turns into this game of chicken. I will give you another projection; I think the tariffs will be settled immediately before the next election, about this time next year. The sad part is that no one will care if it is a good deal or bad deal, it will be celebrated either way. I hope the President does the honorable thing and makes the Chinese do what is right before settling. Whether he does or not, the media will love it and the economists that have been so wrong so often in the matter will line up and tell you “I told you so.” Only here did you get the real facts about tariffs and not the opinions that were wrong.

I have been asked by several readers to retell the story of my father and the history of my upbringing. My father was a big influence on me, although we were never close on a personal level. Since he was a minister, it seemed that he had a meeting of some sort or another at the church every day of the week. Obviously, I was gone during the day at school and he was rarely home at night. In fact, he never saw me play basketball until I was on a college team. But he was truly an inspiration for his intellect and his career.

As I have often relayed, my father graduated from the University of Tennessee with a master’s degree in electrical engineering. Anyone aware of the demands of electrical engineering understands the rigid requirements. To his bad luck, he graduated during the great depression and of course there were no jobs available. It was not that he did not seek out a job, there were simply no jobs available to anyone.

He returned to his home in Chattanooga and after not finding work, he took a remedial high school teaching job where he taught both mathematics and his first love, building things in the shop. His entire life he loved working with wood and he thoroughly enjoyed teaching it to high school students.

His father, my grandfather, was always very active in the church and since the church was only a short walk from his house, they attended often. My father fell into the Ministry, which would end up being his lifelong job and he never returned to electrical engineering. I have often said that my father could do absolutely everything and that was very much the case. One of the interesting aspects of my father was that when we were in Abingdon, Virginia, he became a district superintendent to 114 churches. He did not have a specific church to work at any given day, but he had managerial responsibility over 114 of them. Most of these were very rural churches, sometimes only having 20-30 total parishioners. I spent many of my formative years going with him to these churches, where he worked out the economics of a small church and would always preach the service.

Another lifetime remembrance I have is that he was the only white minister in town at that time that would marry a black couple. In Abingdon, Virginia during the early 1960’s it was a very segregated community. Obviously, the number of black ministers was limited and they all knew my father would marry black couples at any given time. I spent many of my Saturdays and Sundays opening the door for young black couples wanting to get married. I also remember that my father oftentimes would come in from the garden covered in mud to prepare the service. No one ever called to make reservations; they would just show up any time - day or night. I also recall that the compensation for the service was exactly one dollar. That one dollar always went to my mother to be spent on her children. My mother never spent any money on herself; it was always money for the children. My father and mother managed to send 5 children through college without loans when the most he ever earned as a minster was $14,000.

My father’s last assignment was in East Ridge Tennessee. At that time, East Ridge was principally white, but the segregation of the city was ongoing. There was a complete war within the city limits of East Ridge regarding the integration of churches and my father became a central figure in the controversy as he openly campaigned for new members, regardless of their color. The stress and controversy over this took a major toll on his health and he died of a heart attack at age 67, when I was only 25. Maybe he did not need to fight that war, but he always did what he believed to be the right thing. He could have made a lot more money in business, but this was his calling.

At that time, I had already moved to Atlanta, but I went back for the funeral. What made a large impression on me was that members of the various churches where he had preached made the pilgrimage to Chattanooga. People I had never even met and members of the churches he had been 15 or more years removed from showed up at the funeral. The church was overflowing with people who came to express their condolences and I had no recognition of ever meeting most of them. The inspiration to do good and work hard, and in turn be an influence in someone’s life was not lost on me. We should all be so lucky.

On that note, come 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.

CiCi at the beach

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

Best Regards,
Joe Rollins

Wednesday, July 3, 2019

The S&P 500 had its best June performance since 1955... The Dow posted its biggest June percentage gain since 1938 and financial advisers that are giving their clients such faulty advice.

From the Desk of Joe Rollins

It is amazing how quickly the financial markets turn. During the month of May 2019, the financial media tried emphatically to convince you in every way possible that the world as we know it could soon end. Surely, the financial markets would suffer with all of the negative headlines regarding tariffs, inverted bond yields, war in the Middle East and unfavorable relations with other countries. I vividly recall the huge downturn of the markets in May, when the President announced additional tariffs on China. So many financial advisers were spouting the notion that the inverted bond yield would clearly create a recession and stop the U.S. economy flat in its tracks. How did those proclamations work out?

As you can tell by the title of this posting, the financial markets had record results in June. In addition, the many assertions of financial disaster, made by so-called experts, were clearly proven incorrect. I want to go through a few of them and discuss how they were wrong. I also want to cover the extraordinarily bad advice being given by the large financial institutions. It absolutely blows me away that so many people out there are calling themselves financial advisers when, in actuality, they are only salesmen of a model portfolio that has absolutely nothing to do with one’s particular needs. I will cover that in greater detail later.

CiCi in camouflage on the beach

As always, I must cover the financial results for the month of June. It is not often that I get to cover such excellent financial results for a one-month period. In fact, the first half of the year has been extraordinary in its performance and the markets have reached all-time highs. If there is one thing that you as an investor should learn from the sell-off in 2018 and the rally in 2019, it is that you should never believe the people on the television proclaiming “Disaster looms ahead…” What you should believe in are the fundamentals of the market, not the headlines. As I pointed out at the end of the fourth quarter of 2018, and in the first quarter of 2019, the fundamentals were strong, the earnings were great and interest rates were low - all three of those economic factors will lead to higher markets eventually. No question there was volatility and no question that there were many questions raised by investors, but in the end fundamentals won.

The month of June was excellent among the indexes. The Standard and Poor’s Index of 500 stocks was up 7% for the month of June, up 18.5% so far for the year 2019, and up 10.4% for the one-year period. The Dow Jones Industrial Average was up 7.3% for the month of June, up 15.4% for the year 2019 and 12.2% for the one year ended June 30th, 2019. The NASDAQ Composite was up 7.5% for June, up 21.3% for the year 2019 and up 7.8% for the one-year period ended June 30th, 2019. The Barclays Aggregate Bond Index was up 1.2% for June, up 6% for the year and up 7.8% for the one-year period. As you can see, each and every one of the indexes was up very impressively for the month of June and also very impressively for the year to date.

I cannot believe the amount of ink that has been wasted on the inverted bond yield discussion. One thing that always baffles me is the use of graphs by those claiming to know something about stock markets. It is amazing how many people I see expressing their opinion on the direction of the markets by comparing it with a certain date and time in the past. For example, I noticed the other day a so-called graphing expert’s market forecast included the same time period in 1938, 1980 and 2019. Surely, this forecaster is not so na├»ve to underestimate the economic differences between the time periods quoted. 1938 was the tail end of the recession and the country was barely surviving. In 1980 interest rates topped 20% and the country was in a recession. In 2019, interest rates are extraordinarily low, the economy is strong and unemployment is at a 50-year low. Really, if you compare the three time periods, how can any comparison be valid that tries to chart the market? Each of those time periods would have huge differences in the underlying economy, but yet a comparison was made and an opinion expressed. I have to tell you I lost respect for the show that aired such an analyst, given the absurd nature of the assumptions.

Let me give you a more specific example. During the third quarter of 2018, the economy was great and the markets were soaring. At the point the interest rates became inverted, you heard every so-called expert expressing the opinion that within a 12 month to 2-year cycle, the U.S. economy would absolutely be in recession. I sat back when I heard these exclamations and marveled at the lack of support for these opinions. Yes, it is unusual when the federal funds rate is actually higher than a 10-year treasury rate, as it is today. As a predictor of U.S. recession, it is not so precise. In researching the accuracy of these market calls, I went back to actually review the data. Did you realize that the yield curve was inverted in the years 1995, 1998 and the year 2000? Once again, in each of those years the economy was strong and the markets were soaring. However, only in the year 2001 did a recession occur, which had more to do with the dot-com implosion and the terrorist attacks of 9/11. Therefore, even in current economic times this proclamation of a guaranteed recession is not supported by simple research.

Yes, we were truly honored to once again be named to the 300 Top Registered Investment Advisers in the United States by the Financial Times for 2018 and 2019. What gives me great comfort is that there are likely 300 advisors in the Atlanta area and we were picked as one of the top 300 in the United States. But I should not be so surprised at that recognition given the absolute lack of good advice so many advisers are giving. What I found after 40 years in the business is that advisers are oftentimes controlled by their biases for higher income. I see major financial firms filling our soon-to-be clients’ portfolios with these so-called partnership hedge funds and other alternative investments that pay high fees, but earn low returns. These investments make the tax returns very difficult to prepare and if they make money, I would look the other direction. The sheer thought of putting a client in an investment that would give the salesman a 10% commission yet underperform makes me nauseous. It is amazing that clients continue to buy these worthless alternative investments when normal financial investments provide much greater returns without the high commission.

The current trend in the major investment houses is to use salesmen that are barely trained in financial applications. Basically, they just sell a model portfolio that is developed for their clients. What is interesting is that most clients will never talk to the person investing their money. The actual model portfolio has nothing to do with the client and everything to do with making clients adapt to a fixed formula with absolutely no correlation to their financial history. We invest all of your money in this office.

As I have pointed out on many occasions, the financial textbooks all talk about a balanced portfolio between stocks and bonds. The unfortunate part of that financial example is that it was created at a time when interest rates were substantially higher. If you made an allocation to a treasury bond making 5%, well that certainly makes some sense. However, to allocate to a treasury bond today with a 2% coupon for the next 10 years borders on absurd. Basically, if you commit to that 10-year treasury, when inflation is virtually the same percentage, you will be lucky to get back the same inflation-impact dollars that you originally invested. There is no opportunity for growth and the income component is insignificant. Anyone would make that allocation today is clearly does not understand basic economics.

Ava and CiCi on canvas, painted by our client, artist Kim Daniel

We see a lot of clients who have been encouraged to invest in income investments, thus giving up the opportunity for higher returns in equities. Certainly, everyone needs diversification, but each person is totally different. Why would you ever make the same allocation to a person that has leveraged every asset they own and requires high income to service his debt, as compared to a person with no debt and no current need for the money? Most financial advisers would treat those people exactly equal. Basically, they would decide on the allocation of assets based upon their age, their income and their need for income during retirement. However, those people are entirely different and should never be allocated the same way.

As an investor you can see the benefit of these low interest rates. Even as the so-called experts were forecasting disaster with the inverted bond yield, if you really understood the effect of lower interest rates you saw the positive. Once again, homeowners can now refinance at below 4%. In fact, I have seen 7-year fixed and variable rates down close to 3%. Two things happen when interest rates get down this low. The new housing market will pick up due to the fact that more people can afford the mortgages and the refinancing market will accelerate, freeing up more money for homeowners to use for other consumer goods.

Think about all the opinions of impending financial disaster that were shared regarding the effect of tariffs. You may not even recall that in January of 2018, President Donald Trump announced a tariff of 20% to 25% on washing machines imported into the United States. I have written many articles regarding those opinions when they feared these tariffs would force young households to absorb what was sure to bring damaging higher prices.

It has been roughly 18 months since the imposition of these washing machine tariffs. Have you heard any negative financial information regarding these tariffs? In fact, the economic effect has actually been mainly positive. Over this 18-month period, the price of washing machines has gone up roughly 12%, not the 25% cost of tariffs. The washing machine manufacturers in the United States have also been able to increase their prices, stabilizing U.S. jobs, since they do not have to sell their products at a loss. In addition, the U.S. is believed to have collected over $100 million in tariffs from foreign manufacturers in producing these products. While there is no question that people buying new washing machines have to pay a higher price, the effect of helping employees in the United States that work with these products and raising additional taxes from foreign manufacturers seem to weigh in the positive rather than a negative. Once again, the proclamations of financial disaster in reality were never there.

During the month of June, the President announced that effective immediately the U.S. would levy tariffs on all goods coming out of Mexico into the United States. There was huge outrage and public exclamations by so-called experts that the United States could not survive without Mexican products or the workers who migrated from Mexico that do menial work in the states. In fact, it was such a contentious topic that the financial markets dropped just from the announcement.

Employee Lesley Bartlett's kids - Sasha (10), Vincent (9) and Lily (10)

Once again, by Monday of the following week, the tariffs had been suspended with a new working arrangement between the United States and Mexico regarding immigration. Just the virtual threat of tariffs did more to help the immigration policy of the United States through Mexico in 1 week, than what has been accomplished in 25 years. The exclamations of financial disaster regarding tariffs have to be balanced against the economic reality between the countries. In this particular case, while immigration is not an economic factor in itself, the end result will justify the threat. Last month I expressed the opinion that the media was making a bold attempt to otherwise convince the general public that the economy was in trouble. Oftentimes in bold headlines, opinions are expressed that have nothing whatsoever to do with reality. I expressed the fear that the many people who only read headlines and do not follow the facts could be led to believe negative economic news.

In June, with major headlines in virtually all publications, a survey by Bankrate.com indicated that 40% of Americans believe that a recession is already here. When I read that headline, I could hardly believe this was not a joke. 40% of Americans would constitute over 125 million Americans who clearly must live under a rock. How could anyone who sees the prosperity around them truly believe the U.S. is in a recession? As one quote in the survey said, “the unemployment rate is the lowest in 50 years – doesn’t mean that everyone’s got a job, doesn’t mean that everyone’s doing great.” Yes, that is true, there are some people that are not employed. However, I rather suspect that is by their own desire and not for lack of jobs. Every industry I know is hammering for employees and even the fast food industry cannot employ quickly enough.

The next area of improper information for investors is the often-repeated exclamation that the economy is slowing. I get up very early and watch the international news from Europe, Asia and the United States. They bring on so-called experts in the field of investing and the one common expression that they all seem to use is that they are concerned about the stock market because the economy is slowing. Isn’t it interesting that they do not explain why that is a problem or explain exactly what that means? I will give you an opinion here that will convince you that we invest not by tired, old economic theories, but by the reality of the current economy. Yes, it is true that the economy is slowing, but that is a good thing.

Many times, in these postings I have criticized the work of former Federal Reserve Chairman, Dr. Alan Greenspan. I have indicated that for years he ran the economy up and down to the point of boom and bust, which was completely unnecessary. He would allow the economy to accelerate without any type of controls and then he would crash it by increasing interest rates and constricted liquidity. The fact that the current Federal Reserve is attempting to control the economy is much more positive than you might think. The Federal Reserve increased interest rates 3 times recently as the economy strengthened. When the economy slowed, the Federal Reserve announced that the most likely effect would be a lower interest rate in the upcoming quarters. That is exactly what the Federal Reserve should do, move interest rates up in an expanding economy and move them down when it slows. The effect is a leveling out of an economy that should not be “too hot or too cold.” This is completely different than what happened under the Greenspan economy. Let me illustrate that with real numbers.

Everybody remembers the rah-rah years of the late 1990’s. It was a time that the dot-com people were getting rich basically by selling paper on Wall Street. I remember many dot-com companies that had no revenue that were using their IPOS to raise billions in ’98 and ’99. Also, everyone remembers the dot-com skyrocketing in 1999 and crashing in 2000. Very few people understood exactly why this expansion and bust occurred. As we now know, Dr. Alan Greenspan was greatly afraid of what would happen in the Y2K conversion. As is well known, Dr. Greenspan never used computers, nor was he computer literate. Since he did not understand what would take place during Y2K, his primary assertion during the late 1990’s was that the economy must be strong in order to withstand the huge economic bust that would occur when the computers, clocks and everything we know about would not be updated on January 1st, 2000.

To give you an example of his lack of understanding the economy, the GDP in 1997 was 4.4%, inflation was 1.7% and unemployment was 4.7%. In 1998, the GDP was 4.5%, inflation was 1.6% and unemployment was 6%. In 1999, GDP was 4.8%, inflation was 2.7% and unemployment was 6%. Each of those numbers are extraordinarily good, but should illustrate that they are way too hot. The Federal Reserve did nothing to slow and temper the economy during these crazy financial times. In fact, GDP was above 4% for 4 straight years during these times and what do you think the Federal Reserve actually did?! Beginning in 1997, the Federal Funds rate was 5.5%. As compared to today, the Federal Funds rate is roughly 2.25%. During 1998 with the GDP growing at 4.5%, rates actually went down from 5.25 to 4.75%.

The Federal Reserve should have been proactive in an economy that clearly had become too strong. Yet, the Federal Reserve allowed it to do so, leading almost assuredly to a hard landing at some point. Not until June of 1999 did the Federal Reserve increase rates, and they did so very aggressively. On June 30th, 1999, the Federal Funds rate had been raised to 5% and less than one year later the Federal Funds rate was at 6.5%, increasing over 1.5% in less than one year.

Employee Shelley Fietsam's son, Cameron (11)

As you would expect, when the Federal Reserve increased rates so dramatically over such a short period of time, the economy took a severe downturn. The NASDAQ Composite suffered a 75% decline from March of 2000 to the end of 2002. In fact, the GDP in 2001 fell from 4.1% in 2000 to 1% in 2001, which was also attributable to the 9/11 attacks. Recall that I indicated the Federal Funds rate at March 16th, 2000 was 6.5%. At the end of 2001, 18 months later, that same rate was at 1.75%. I could go back and give you all of the reasons why these interest rates jumped around and the effect on the economy. But the one thing that we need to understand is that the Federal Reserve was asleep at the wheel. They should have been increasing interest rates during 1997, 1998 and 1999 to smooth out the economy and reduce the volatility in the economy. Certainly, the recession in 2001 was wholly created by the Federal Reserve and the absolute avalanche of rate cuts in 2001 were to cover their footprints.

I gave you a long economic history to explain why the current fact that the economy is slowing is positive for stocks. It is clear that the Federal Reserve intended to slow the economy in 2018 and they were successful in doing so. It also is clear that the Federal Reserve intends to stimulate the economy later this year to keep the economy strong. All of these are extraordinarily positive signs for future stock prices. Unlike the proclamations by the so-called experts, a level economy is what we all desire. We desire a GDP of roughly 2%, an inflation rate of roughly 2% and unemployment of roughly 4%. The fact that we have been operating at those levels for several years now is extraordinarily positive.

As we sit here today, we certainly expect volatility for the rest of the year. It is crystal clear that the media will attempt to convince you that the economy is weak. We now know that their attempts are based on incorrect, incomplete information. The economy is not weak, but yet strong. If the Federal Reserve does their job over the next 6 months, there should not be a recession over the next 2 years. It also is clear that corporate America is focused on higher earnings and is using the worldwide economy to improve their financial outlooks. I have been saying for a long time that the reason the market continues to go up is that interest rates are low, the economy is strong and earnings are high. As we sit here in July 2019, those particular items are actually better today than they were 6 months ago and therefore I project that the market will zigzag its way higher and round out the year 2019.

There is no question that a sitting President has a great effect on an economy. A President can do many things to stimulate an economy leading into an election. There is also no question that this President desires for the economy to be stronger as he campaigns for lower interest rates from the Federal Reserve. Since it is inevitable that this President would like to be reelected in 2020, there is a high likelihood of the economy continuing to expand over the next 18 months. Those that are espousing a recession in the United States either are expressing an opinion without any type of economic background or clearly have political biases in their exclamations. One of the things we try to do here is give you facts, not headlines. The facts do not support any type of recession, which likely moves the market higher rather than lower without a geopolitical event occurring. You can not invest for geopolitical events; you can only invest for the financial fundamentals.

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.

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

Best Regards,
Joe Rollins

Monday, July 1, 2019

Happy 4th of July!

In observance of Independence Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Thursday, July 4th and Friday, July 5th. We will re-open for business on Monday, July 8th at 8:30 a.m.

If you have any pressing matters that require immediate attention on Thursday or Friday, please do not hesitate to contact any of our staff.

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Thursday, June 27, 2019

Rollins Financial Garners Another National Recognition

From the Desk of Joe Rollins

Since 1990, we have always strived to set ourselves apart from the plethora of financial advisers located here in Atlanta and around the United States. We recognize that every individual is unique, from their financial situation to their future goals, but we believe EVERYONE deserves a financial adviser who puts the needs of their clients first. As a fiduciary, that is exactly what we are required to do, but frankly, we really enjoy helping people and would do so anyway.

When I started my CPA practice out of my living room in Fairburn, Georgia in 1980, I would have never dared to dream of receiving national recognition for my company. Now, 40 years later, we are both excited and honored to announce that we have, once again, been named to the Financial Times 300 Top Registered Investment Advisers* – making the list in both 2018 and 2019. “The list recognizes top independent RIA firms from across the U.S. This is the sixth 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.”

The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by the Financial Times (June 2019). The FT 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research.

The listing reflected each practice’s performance in six primary areas:
- Assets Under Management (AUM)
- AUM Growth Rate
- Years in Existence
- Advanced Industry Credentials of the Firm’s Advisers
- Online Accessibility
- Compliance Records

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 $4.6 billion in assets. The FT 300 Top RIAs hail from 37 states.

We believe that you can overcome an abundance of weaknesses in many areas by simply being committed to hard work. But, in my opinion, the extent of our success would not be attainable through hard work alone – that hard work must be accompanied by the ability to successfully manage clients’ money. My staff works diligently for many hours a week, and even on the weekends during tax season, to try to achieve such results for our clients. All of my partners, Robby Schultz and Eddie Wilcox of Rollins Financial and Danielle Van Lear of Rollins & Van Lear, have been at the firm in excess of 15 years, and provide our clients with the knowledgeable and dedicated service they have come to expect.

From left to right: Danielle Van Lear, Robby Schultz, Joe Rollins and Eddie Wilcox

Over the last several years, we have received the following recognitions:

• Atlanta Magazine FIVE STAR Wealth managers, 2009-2018
• #20 on CNBC’s List of Top 100 Fee-Only Wealth Management Firms in the U.S., 2015
• Accounting Today Top 150 CPA Firms by AUM, 2017
• Financial Times 300 Top Financial Advisers, 2018
• Accounting Today Top 150 CPA Firms by AUM, 2018
• Financial Times 300 Top Financial Advisers, 2019
• Accounting Today Top 150 CPA Firms by AUM, 2019
• AdvisoryHQ’s 11 Best Financial Advisors & Planners in Atlanta, GA, 2019

When we received the award from CNBC based on assets at December 31, 2014, we managed roughly $274 million. Today, our assets under management total nearly $600 million; therefore, in the last four years we have more than doubled the size of our firm. And the fact that we continue to receive national recognition is completely attributable to the hard work of my staff and loyal clients like all of you.

We thank you for your trust and look forward to growing with you for many years to come.

* This award does not evaluate the quality of services provided to clients and is not indicative of the practice’s future performance. Neither the RIA firms nor their employees pay a fee to The Financial Times in exchange for inclusion in the FT 300.

Best Regards,
Joe Rollins

Wednesday, June 5, 2019

Why is the media trying to scare you regarding tariffs? Is it the truth, or fake news? Tariffs will not destroy the economy, neither in the United States nor in China.

From the Desk of Joe Rollins

It seems like every time I turn on the TV the financial news reporters are hyperventilating over tariffs. I, on the other hand, have never quite grasped the urgency of the matter. From a philosophical standpoint, there is absolutely no question that a properly trained economist would not want any type of tariffs on any type of goods being transferred between countries. However, in order for trade to be on a fair and equal basis, it must be in a totally free economy, where governments do not control companies and competition. Unfortunately, that is not the case for China.

There is no question that trading with China has needed reformed for decades. Their capital structure, which owns or controls many industries in China, attempts to compete with U.S. based companies that are not controlled by the government. The end result of that competition is that while the consumer benefits from lower prices, it is detrimental to the U.S. economy in that it transfers goods formerly manufactured in the United States over to China, with the corresponding loss of U.S. jobs. If they were competing on a fair basis, there is no question that the consumer would benefit from the economic windfall; however, for the consumer to win, but the country to lose, is a complete misnomer and not good for the United States.

The media’s overreaction to this tariff matter is almost mindboggling. I often fear that investors get all of their financial information from just reading the headlines or on social media. Too many investors do not bother to do their own research to determine whether the severity of this situation warrants the incredible volatility that the stock market has suffered through this year. But before I go into more significant details regarding the incredibly negative headlines, I just want to give you one fact.

According to Deutsche Bank, there has been roughly $5 trillion in losses within the equity markets due to the perceived issue regarding tariffs. Just as a basis for comparison, Deutsche Bank points out that this $5 trillion loss equals 12 full years of the bilateral merchandise trade deficit with China. Therefore, in a period of less than 6 months, we have suffered losses in our own equity markets greater than the import export deficit over the last 12 years. If you really want to talk about an overshoot or a lack of understanding of economics, there it is in black and white.

Ava feeding geese in Ohio

Ava on her 8th birthday

Before I launch into more interesting topics, I do have to cover the financial markets for the month of May. Clearly it was a down month in every respect, but the year-to-date numbers are still quite impressive.

There is no other explanation for the economic performance during the month of May other than it was pretty crappy. The Standard and Poor’s Index of 500 stocks was down a cool -6.4% for the month, but continues to be up 10.7% for the year 2019. For the one-year period it is up 3.8%, the 3-year period it is up 11.7 % and the 5-year period 9.7% annualized. The Dow Jones Industrial Average was down -6.3% for the month of May, but it is still up 7.5% for 2019. The one-year returns are 4.1%, three-year 14.4% and five-year 10.9% annualized. The NASDAQ Composite was the big loser of the month as it was down -7.8%, but yet it is up 12.8% for the year 2019. The one-year returns are 1.2%, three-year 15.9% and five-year 13.2%.

As you would suspect, when the equities are down the bonds will be up. The Barclays Aggregate Bond Index was up 1.8% for the month of May 2019, 4.8% for the year 2019, 6.7% for the one-year return, with the three-year up 2.5% and the five-year 2.7% annualized. Even though the one-month numbers were pretty ugly, the year-to-date numbers for 2019 are still quite respectable. As I will explain later, I expect better returns as the year 2019 progresses.

Often times, I feel like the hysteria that you see in the media must be political rather than informative. How could respected journalists actually misinterpret the information and inform the public so poorly that it could be anything other than intentional. It has gotten to the point where the facts are completely drowned out by the noise. Let us take the recent proposed increase in tariffs between the United States and Mexico, for example. You would have thought that an economic disaster was imminent given the reaction in the media. But wait a minute, did you even bother to look at the facts or did you actually sell before you understood?

I am reminded of the recent quote by Warrant Buffet’s 95 year old right-hand man, Charlie Munger, who has demonstrated economic prowess for the majority of his life. While Charlie has openly supported Democrats over the years, he recently expressed that “Donald Trump is right on (immigration).” At the shareholders meeting at the Berkshire Hathaway company, he exclaimed “Democrats are committing suicide…they hate him (Donald Trump) so much that they’re against him even when he’s right. We should have way more control over our borders than we do.”

So, the proposed tariff increase in Mexico was basically a call for help in the immigration disaster that is occurring along the southern borders. This weekend it was announced that over 900 immigrants were crammed into a border control center that was designed for 125 people in El Paso, Texas. There is a bona fide disaster occurring along the borders of the southern United States, but you rarely read about it in the press.

I sit at home sometimes and contemplate what exactly Congress is talking about when it comes to immigration. Surely no one in their right mind wants unlimited immigration into this country, or do they? Does anyone understand the economic effects of trying to take care of all these immigrants during the short-term and then supporting them over the long-term? Do we not have laws on immigration?

These immigrants come to this country with virtually nothing. The U.S. government supports them in every form and fashion after their detention. The cost of supporting them is astronomical and we, the taxpayers, pay every dollar of it. And yet, the elected officials in Congress cannot have a reasonable discussion on the subject since it has become so politicized. Surely, they want to protect our borders.

Notwithstanding the political ramifications of such a move, did you even bother to consider the economic aspects of this transaction? Even though the 5% proposed tariff has not occurred, our financial markets sold off with immediate haste. Did you even realize that the peso declined by 2.7% on Friday? So in just one day, the cost of the 5% proposed tariffs was already reduced by half.

It is also true that there is a high likelihood that these tariffs will never be put in place. It would not be a huge commitment for the Mexican government to make an attempt to regulate the borders, which would postpone such tariffs. They do almost nothing now. But assuming the absolute worst situation, the full tariffs imposed in the automobile industry, according to Deutsche Bank, would be $93 billion. If the auto industry was responsible for the full absorption of this cost and passed this along to the consumer, this would increase the cost of a vehicle by $1,300 per unit sold. Ponder the economic reality of those numbers.

First off, most people do not buy a new car every year. In fact, now the average age of a car in the United States is roughly 9 years old. So the effect of the purchase of new cars would only affect relatively few Americans. I believe that if it costs $1,300 per car to attempt to bring the border matter under control, then that seems like a cost that each and every American should be willing and happy to absorb. I am not sure exactly what it costs to house, feed and provide medical care to the flood of immigrants that are coming across the southern United States border, but I would bet that the $93 billion referenced above would be close.

Let us move on to the Chinese tariffs, where the information is so misleading that I rather suspect that most people do not grasp the economic effect of these proposed tariffs. Let us look at the real numbers as compared to those quoted in the financial press. The only numbers you should evaluate when comparing the U.S. against the China’s economy is nominal GDP. For 2019 the U.S. nominal GDP is projected to be $21.3 trillion, with China’s projected to be $14.2 trillion. So in true economic terms, the U.S. nominal GDP is approximately 50% higher than the Chinese nominal GDP as of 2018.

Josh skydiving for his birthday

What are the true numbers regarding imports and exports from China? During 2018 the United States imported from China roughly $539 million. Correspondingly, the U.S. exported to China $120.3 billion in 2018. The financial media argues there would be an enormous financial effect on the U.S. taxpayer if China no longer imported goods from the United States. Article after article has been about the farmers’ financial disaster because of the lack of exports to China if tariffs are imposed. Farm crops exported to China in 2018 were $5.9 billion. You may have read most recently where the President provided a subsidy of $15 billion to U.S. farmers affected by the lack of exports to China – this amount is 3 times the actual dollars exported to China. More fake news.

What real effect do China tariffs have on the U.S. consumer? Do you realize that if we were to exclude 100% of the exports of China, the effect on the U.S. GDP would be less than ½ of 1%? Why are we so paralyzed by the potential of losing such a small amount of goods?

Let us also evaluate the other side of the transaction. What would happen if 100% of the proposed 25% tariffs were also imposed on all of the goods coming from China to the United States? According to Oxford Economics, the full cost of that tariff would be $62 billion per year on the goods already proposed for the 25% increase. Now listen to the economic effect of this carefully. Based on Oxford Economics, the total out of pocket cost for this increase in tariffs of 25% would only be $490 per household. Based on the media, you would think that this number would be crippling to the U.S. economy. While $490 is a lot of money to some people, to most Americans it is insignificant. I think if the public totally understood the financial implications of getting our arrangements straight with China, they would gladly support this cost (which barely equals double their Netflix monthly subscription fee on an annualized basis).

So, here we are evaluating both sides of the tariff arrangement with China. We recognize that our exports to China are relatively immaterial to the U.S. economy, and that the cost of the tariffs on imports from China is totally immaterial to the average U.S. household. But what else are we not evaluating that should be considered?

During the month of May, the stock of Apple went down 20% because of the perceived problems with the Chinese tariff matter. I recognize the fact that journalists might not be the smartest business people in the world, but surely you must realize that the most profitable company in the world has long since contemplated this issue. Do you really think that Apple has not looked for other means of handling their goods coming out of China? Do you not think that they have adjusted their supply lines from China to Vietnam, India and other Southeast Asia countries? Do you think that the most profitable company in the world is not smarter than the financial analysts that write the headlines?

You may rest assured that Apple, along with most all U.S. companies manufacturing in China, have already evaluated moving their production out of China to a part of the world much more efficient. The longer China holds out to making a deal with the U.S., the more manufacturing that will escape that country and move to more U.S. friendly countries. Yes, it is possible that China could prevent all U.S. imports from occurring and they could also punish U.S. companies that function in China, but it would be to their own detriment.

China is in a situation where they need us a lot more than we need them. Certainly, they could punish U.S. companies operating in China, but that means that Chinese citizens would lose their jobs. If manufacturing and supply lines moved out of China, then who would replace those jobs, and at what cost? The Communist party has been able to control the government in China over the last 30 years for one simple reason. As long as the people are working and they are able to move from the fields to the cities in China, they are happy with the nondemocratic government. But China realizes that they cannot risk putting citizens out of work. That risk would be overwhelmingly negative for their non-representative government. It is my opinion that China will do everything to prevent that from occurring and certainly they will not punish U.S. manufacturers in China if it means higher unemployment for the average Chinese citizen.

I was reading an article the other day in USA Today that made me wonder whether the journalist writing the article did any research whatsoever to base the story upon. Basically, his assumption was that China will get really irritated with the U.S. over this trade matter and “invoke its nuclear option”. No, not nuclear in the way of a military bomb but economically, by selling 100% of the U.S. treasury’s bonds held by the Chinese government. While this article may have been written to scare the average investor, it is certainly not based on any type of economic reality.

First off, it is believed that the Chinese government directly holds over $1 trillion in U.S. Treasury bonds. As a point of fact, there are not enough bonds issued by all of the governments in the world that would be a substitution for these Treasury bonds. For example, if the Chinese government attempted to sell all of these bonds immediately, who would be the buyer? Clearly, a wholesale rush to sell these bonds would lead to much higher returns and losses on these bonds leaving the Chinese with absolutely nowhere to invest the money since there are not enough bonds issued by any government in the world to replace the U.S. $1 trillion.

The principal reason why the Chinese government could never sell the bonds is more basic. If they sold the bonds that would mean that they would be selling their U.S. dollars and converting that money back to their local currency. The effect of that transaction would be to absolutely destroy the valuation of their currency in the world market. When you convert from U.S. dollars to local currency, you dramatically decrease the value of the dollar against your local currency. This would be devastating to the exports from their country, therefore lowering the value of their currency in all worldwide transactions. Certainly not a smart move by the Chinese government even if they just want to inflict pain on the U.S. government. I do not think the Chinese are so dumb that they would make any moves that would be detrimental to their own currency.

This week they once again rolled out the assumption that the yield curve inversion between the 3-month Treasury bills and the10-year notes would certainly mean a recession in the United States. The same people who wrote the article in 2018 were writing it again - that it was a 100% indicator that the economy will fall into a recession when short-term yields are higher than long-term. If you want an example of how silly interest rates have become, consider the facts. At the current time the 5-year Treasury is earning less than a money market account in America. What sane person on Earth would take a 5-year risk on a bond when you could make exactly the same rate of return or even higher on a money market account? Secondly, the dividend rate for the S & P 500 is now greater than the interest rate on the 10-year Treasury. Would you prefer to invest in something that has growth potential or would you rather take a 10-year risk that interest rates will not go up over the next decade? Once again, not a reasonable comparison to the informed investor.

Yet, here we are again. The same people who have forecasted a financial disaster in the fall of 2018 are back again making the same prediction. Do you want to know when the last time that the inversion of interest rates created a market sell-off, followed by forecasts that the U.S. economy would soon be in a recession? That was in September 2018. The so-called experts projected recession would clearly follow and the markets would fall. While it was true that the market fell in the last quarter of 2018, the economy today is as strong as then and clearly shows no signs of decline. No recession in sight. Fake news.

The reason why the 10-year Treasury rate is so low has everything to do with competing interest rates around the world. As of the date of this writing, a 10-year Treasury has a current rate of 2.133%. While that rate is extraordinarily low, by worldwide comparisons it is an extraordinarily high rate. The 10-year bond in Germany has a current yield of -0.207%, in Japan their 10-year Treasury has a current rate of -0.102% and no, that is not a mistake. Those rates are actually negative in both Germany and Japan. Basically, if you buy a 10-year Treasury in either Germany or Japan, at the end of the 10-year period they will give you back less money than you actually invested. Now that is a good deal?

Ava fishing in Florida.  After this
picture was taken, I showed her how
to cast and the rod slipped, fell into
the water and sank.  I prefer to buy my
fish at the market anyway.

What reasonable investor would make the decision to buy these bonds when they can buy a similar bond in the United States with better credit, yielding 2.133% or higher. The belief now is that there are roughly $10 trillion in government bonds around the world that are yielding negative rates of return. Germany is fighting a potential recession and they are encouraging people not to save money, but rather invest it in the economy. The same has been true for Japan for roughly 20 years as their economy basically sits at breakeven. Therefore, there is a flood of money from the rest of the world investing in U.S. Treasury rates that, while incredibly low, are still the highest in the world at the current time with the very best credit list.

So, to use the words of my nemesis, Dr. Alan Greenspan, when asked why long-term interest rates would not go up, “it’s a conundrum.” You would think by reading the financial headlines that the U.S. economy is a conundrum and therefore susceptible to huge risks. In fact, nothing could be further from the truth.

Low interest rates are extraordinarily favorable to stocks, which we have at the current time. At the beginning of this year, it was estimated that the U.S. S&P 500 companies would earn $171.10 per share during 2018. Since that time, it is now estimated that the S&P 500 earnings for 2019 will now be $175 per share. More importantly, it is projected that S&P 500 earnings in 2020 will be $187, going up 7.5% year over year. Do you recall reading that there would be a huge reduction in corporate earnings this year due to the tariffs and the potential recession? Completely false – fake news.

It is amazing to me that people write headlines, but that they do not check the facts. Let us assume that we only use $175 estimated earnings for 2019 and put a 17 multiple on those earnings; we would expect that the year-end numbers for the S&P 500 would be 2,975. As I write this posting the current valuation of the S&P 500 is 2,752, which would imply an 8.1% gain in that index before the end of the year.

So back to my original thesis as to what is going on in the equity markets. I think, for reasons that are unclear, the media is trying to scare the average investor from their position so that the professionals can take advantage of the upswing in the market that is surely to come. I have no idea what their motivation is to write such negative articles other than maybe they do not have anything else to write about since things are so good. If you evaluate the U.S. economy based on its full employment, extraordinarily low interest rates, and great earnings that are increasing as the year progresses, a higher stock market is almost surely at hand. Notwithstanding there will be high volatility based on headlines, this too will soon pass. While the economy is slower than it was earlier this year, it is still extraordinarily strong.

You should never invest your money based upon current headlines or an analyst’s interpretation of the facts. You should independently evaluate facts and make a determination as to their validity. As of today, nothing has changed. While the volatility is upsetting and it clearly affects your portfolio, the only thing that would create a permanent long-term reduction of the value of your investments would be an oncoming recession. As of today, clearly there is no evidence of such a downturn coming this year.

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.

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

Best Regards,
Joe Rollins