Saturday, March 14, 2020

Just Let the Machines on Wall Street Continue to Spin, We Are Focused on Investing, Not Trading

From the Desk of Joe Rollins

A funny thing happened during the month of February that no one could have forecasted. In the middle of February, we hit all-time highs on the major market indexes. After enjoying a 31% gain in 2019, you would certainly expect some sort of pullback, but the fact that in the first 6 weeks of the year we hit all-time highs was very comforting. But then, the last two weeks in February, leading up to leap day on February 29, 2020, the bottom literally fell out of the market. In that two-week period the market was down roughly 13% and what had become a very satisfying stock market for the year, ended up being a small loss as of the end of February. What was troublesome about this selloff was that it was not based on economics or any type of proper evaluation of the economy and the earnings that support the stock market. It was based totally on the unknown with exaggerations that exceeded any type of level of reasonableness about a condition which none of us have any knowledge. It was not based on economics, it was totally based on fear.

What Ava does during tax season 

In this posting, I would like to try to uncover some of the actual truths as compared to the nonsense that the major news agencies report. It is unfortunate that the swift selloff of the market also covered up unbelievably favorable financial results for the economy. In addition, I want to cover the politically motivated hypocrisy oftentimes found when reporting the details of the economy. There is so much to report on and so much to discuss that I will only hit the highlights during this posting.

Before I launch into reporting all of this terribly interesting information, I must report on the negative results for the month of February. For the month of February 2020, the Standard & Poor’s Index of 500 stocks ended down 8.2% for the month and is down 8.3% for the year 2020. Just so there is no confusion, the market is still up 8.2% for the one-year period and is up 12.7% on average for the last 10 years. The NASDAQ Composite was also down 6.3% for the month of February and down 4.4% for the year-to-date. The one-year performance on the NASDAQ Composite is 14.9% and is up 15.7% on average over the last 10-year period. The Dow Jones Industrial Average was down 9.8% for the month of February and is down 10.6% for the year 2020. For the one-year period it is up 0.4% and for the 10 year it is up 12.2% on average in each of those years.

While certainly a disappointing month, as you can see the 10-year average in all three major market indexes averages well into double digits. As you would expect, while the equity markets were down the bond market was up in February. The Barclay’s Aggregate Bond Index was up 1.8% for the month of February and up 3.9% for the year 2020. However, over the last 10-year period, this index has averaged 3.9% per year. As you can tell, the bonds, while positive for the year so far, cannot even come close to comparing with returns for the equity indexes over the last 10-year period.

I will have a lot to say about the bond index later in this posting, but it is very important to understand that typically when stocks go up, bonds go down, and vice versa. During this month, such a tremendous amount of wealth was transferred from equities into bonds that it completely warped the bond market as we know it. All major bond durations hit historically low rates of interest during this month. Never before in the history of American finance have bond yields returned such a small investment, and almost all are below the cost of inflation. That extreme position must be discussed in greater detail which I will do below.

After 40 years of being in this business, I have always been fascinated by why people are so focused on the very narrow performance of a week or even a month. After a year when the S&P 500 Index generated a total return of roughly 31%, why one week of selloffs would bring any level of surprise to anyone beats me. It would be a natural reaction to conclude, after such a large run up, that there would have to be some giveback at some point. Unfortunately, this particular case is not a good example. This selloff was incurred not for reasonably good reasons, but rather for shared speculation on a subject which none of us really, truly understand.

When we talk about the Coronavirus, we are talking about a subject that almost none of us have the qualifications to discuss. I will be the absolute first to report that I know almost nothing about medicine, but I think I am pretty good at arithmetic. I was always a good student in mathematics, statistics and probability. I think I am as qualified as most to calculate how those ratios affect our everyday life. If you look at the results of the Coronavirus, you cannot help but think that the numbers, as quoted, are somewhat misleading.

I analyze the figures as reported by the Johns Hopkins’ CSSE website, updated every day for the Coronavirus outbreak. It is considered to be the most up-to-date and knowledgeable in this field. As I read it every day, I am amazed at how the information contained therein is either exaggerated or misreported by the media. Just a few examples for you to consider.

Two 35 year clients, Roy Benson and Roger Moffat, watching the sunset in St. Petersburg, Florida

The headline, which I read on March 14, 2020, presents the total confirmed infections of this virus to date to be 147,838. Rarely do you read that many of these cases have fully recovered and that number, reported as of this day, is 71,718. Therefore, a proper evaluation of this information would indicate that only 76,120 cases that were reported continued to be sick around the world. In the United States, as of this morning, there are 2,175 reported cases. I need to remind you that in the United Sates there are 327 million people. In mainland China, which is the epicenter of the outbreak, after recovery there are only 28,016 confirmed infections. Once again, I remind you that China has roughly 1.4 billion residents and the amount as reported is relatively insignificant to the population. Yes, there have been tragic deaths of 5,550 so far that have died of Coronavirus. Once again, I would remind you that worldwide 3,287 people die every single day, 365 days a year, from automobile accidents. Everyone has said it, but I will repeat it. During the last flu season in 2019, over 60,000 Americans died of the common flu.

So in roughly two weeks, U.S. stockholders lost the equivalent of $4.6 trillion in wealth from the high that was reached on February 9, 2020. Such a swift and concerted downturn has not been seen in this country since the financial fears of the 2008 selloff and horrific tragedy of September 11, 2001. It hardly stands a comparison, given that September 11, 2001 was a devastating tragedy in this country and one that would change the course and protection of its citizens forever. To compare the loss in the equity markets due to a fear of a virus none of us understand seems to diminish the importance of September 11. What was even more baffling to me was the economic news during this month was extraordinarily positive and yet from every major news outlet the projection of recession or even the “black plague” in America was everywhere. Every person who could get on TV to expand upon the negativity of the effect of the virus on the American economy was present. Nowhere did you hear the good economic news that was recently reported.

Just this last Friday the unemployment for the month of February was announced. During the month of February, employers added 273,000 new jobs to their payrolls. This was 100,000 more than the average that economists had estimated. Even more importantly, they revised the previous two months up by 87,000 new jobs. Incidentally the unemployment rate dropped again to 3.5%, the lowest number of unemployed over the last 50 years. It is hard to have a recession with 3.5% unemployment.

Josh and Carter enjoying an Auburn  game

There have been a lot of conversations and discussions regarding certain parts of the economy that have suffered due to the virus. There is no question that the airlines and cruise industries are suffering, but, in most cases, the economic effect of these are a zero sum game. It was announced that one major restaurant chain was losing $1 million a day in sales due to the Coronavirus outbreak. It is understandable that fewer people would want to eat out while the infection rate is growing rather than at a time of relatively calm. However, the effect on the economy of that $1 million may not even be a real loss. I can assure you those people that would have eaten at a restaurant are eating somewhere else. Therefore, rather than spending the money in the restaurants, they are spending it at the grocery store or fast food or delivery services. This money was not evaporating, it was just being utilized in a different place in the economy.

So many point out the effect of the airline industry, but consider it another way. If my company has a convention in Barcelona that we were going to send 5 attendants to, but canceled due to the threat of the virus, what were the economic effects? Unquestionably the airlines were affected since the people did not fly, the hotels since they did not stay there and the employees of the hotels since they were not needed that weekend. However, consider that the company actually saved themselves the money that would have been utilized to send them to Spain and allocated those resources elsewhere. The President mentioned the other day that he was glad more Americans were staying in the United States and spending their money here. I also am glad of that since money spent here, as compared to overseas, improves our GDP and weakens theirs. However, we are aware that this means tourists will not be visiting the United States to spend their money either. Will this be a real loss – it remains to be seen.

I have set up various notifications on my iPhone that I find of interest - mainly related to financial and business news. I got up on Saturday morning and received a notification from Bloomberg with a statement, “The U.S. may already be in recession due to the Coronavirus.” That particular statement struck me as rather strange since there is clearly no evidence of any material business slowdown due to any events going on today. You have to wonder whether that statement might even be political in nature. After Michael Bloomberg decided to drop his run for president, he devoted his fulltime, attention, money and staff to the election of former Vice President Joe Biden. I guess I will now always wonder whether statements out of Bloomberg’s news are statements of economic reality or political necessity. Is it true or fake news? Anyway, I read the article, which was, of course, subjective based upon perceived concepts and not proven economic facts.

Within a couple of hours of receiving that notification, I received a notification that the Atlanta Federal Reserve had increased its GDP estimate for the first quarter of 2020 on March 9, 2020. It is viewed by many that the GDPNOW, as published by the Atlanta Federal Reserve, is the most reliable of all forecasters of GDP as the month progresses. I guess it was just ironic that on this Saturday after Bloomberg had provided the supposition that we might already be in recession in the United States, that this Federal Reserve had increased its estimate of GDP for the first quarter from 2.7% to 3.1%. There you have two learned sources providing 100% contradictory economic news. Which could possibly be correct? Surely GDP might come down, but how much?

Longtime client, Georgette Samaritan, visiting our office

I have explained before how the large hedge funds manipulate the market with their trading activity. If you really want to try to move the market you would short the major market indexes and buy bonds. Therefore, you would sell a short on the Dow Industrial Average, S&P 500 and the NASDAQ. Whatever proceeds were involved, you would invest in Treasury bonds, which would lower stock prices, and increase the value of the bonds. The reason you know this was going on so heavily in the last two weeks was the enormous effect it had on major stocks. When you drive down a stock like Apple, Facebook and Google by 15% in a week, you know it is not the fundamentals of the companies, but rather, wild bets by hedge funds and momentum traders to move the market. If you are going to move the market, it is a necessity that you move the big stocks or otherwise you cannot force the market down.

Have you noticed when these large swings in the market occur, the indexes all go down approximately the same percentage? There is no picking of individual stocks to sell, they just sell all of them in order to get the negative effect. When you sell the indexes, you sell the good stocks and the bad stocks at the same percentage. If you are watching a major downswing or, conversely, a major upswing you will note that these indexes all trade about the same percentage. This is not the average investor buying and selling stock. These are the hedge funds and momentum sellers transacting billions of dollars to short the indexes and buy the bonds. You may rest assured that the transactions are short-term in nature and must be reversed over a short order. This has absolutely nothing to do with investing but has everything to do with speculation. You should never trust your retirement assets to speculation. Focus on investing, and let the speculators do their own thing.

The other way you know that it is the work of speculators is that they plow so much money into bonds that it totally distorts their value. As an example, bonds have become totally distorted in this latest trading momentum. For the first time ever in American financial history, the 10-year Treasury Bond is now trading below 1%. As of the close, this bond was trading at 0.773%, which is roughly 25% below 1%. Never in the history of American finance has 10-year Treasury bonds traded this low. Even more unbelievably, the 30-year Treasury bonds now trade at 1.297% for a full 30-year period. The reported inflation rate currently is at 2.1%, therefore, if you bought this 30 year bond and it was trading at a full point below the rate of inflation, you would be guaranteed to lock in a negative performance for every day in this 30 year period.

It is my opinion that no sane investor would ever enter into a 30-year agreement with guaranteed huge losses. When the 10-year Treasury rate was at 1.6% (this was roughly two weeks ago) there was a very interesting quote by Warren Buffett. Warren Buffett set out this particular proposal, “If somebody came to you with a stock and said, you know, "This is a terrific stock. It sells at 70 times earnings. The earnings can't go up for ten years," you'd say, "Well, explain that to me again.” The example he was quoting was the return on a 10-year Treasury bond over the next 10 years. As you would imagine, no sane investor would ever make such an investment in an instrument so overvalued with no upward potential over the next decade.

While it is true that bonds are currently distorted, it does not give me major concern. I feel relatively confident that when the traders decide to reverse the transaction and buy stocks and sell bonds, the bonds will revert to a normal valuation. The key is when will that be? No one knows, but it will.

It could be said that maybe we should restrict the trading capacity of these traders, so as not to misinform the public. I am not a supporter of more regulation in virtually anything. Restriction tends to distort numbers even worse than the traders did these last two weeks. What we need to do, rather than regulate, is to educate. If investors understood exactly what was taking place with these traders, they would not express concern, and it would not create adverse economic effects. Let the traders do their thing, and let investors wait out the volatility for better times. What is even more amazing about the Treasury bonds is that even though a 30-year Treasury bond pays 1.297%, the dividend rate on the S&P 500 now exceeds 2%. Further, I can give you a list of 15 to 20 stocks that have a dividend rate in excess of 5%. You do not need to be a trained economist to understand that if a Treasury bond pays only a fraction of the dividend of stocks then the stocks are a better opportunity.

Among all the negative news regarding the Coronavirus, little has been said about the positive attributes of reduced oil prices. The oil cartel (which would clearly be illegal in the United States since it is a monopoly of companies working in collusion for pricing of oil) could not reach a happy medium last week. Due to the significant drop of the price in oil by the perceived concept that the world demand for oil would be lower, the Saudi Arabi had requested that OPEC reduce production and therefore increase the price of oil. All members of OPEC agreed, except Russia. Since Russia would not agree to reduce its production, Saudi Arabi announced, essentially, what would be war against the other producing OPEC countries. Saudi Arabi immediately announced a 10% increase in their production and threatened to increase production even more. If Russia wanted to play hard ball, they were willing to play and they have vast reserves.

MiaRose Musciano-Howard’s son,
 fully decorated Staff Sergeant Mitch (15),
attending The Military Ball

You have to love when two oil national powers get in a fight that benefits us. The result of this squabble between oil producing countries will clearly be that the price of oil will come down. As the price of oil comes down, nearly everyone benefits since virtually all manufactures and consumers in the United States use significant amounts of oil. So as the price of oil goes down, more money is available to consumers to spend which helps the economy. Price of oil is down, cost of living is down, huge benefits for Americans.

Every time I talk to a client regarding the volatility of the market, I ask the same series of questions. The first question I want to know is, how quickly do you need your money? Do you need it in 90 days, or do you need it in 20 years? If you don’t need it for 20 years, why do you even care what the market does daily? It has been proven in multiple studies that the market goes up roughly 80% of the time. Over the last 75 years the market has averaged annual gains of approximately 10%. No one should evaluate the market based on what it does on a daily, weekly, or monthly basis. I have never quite understood why someone who does not need their money for 20 years panics when you get these large moves. What most everyone should do is just sit back, interpret the data, and ignore the traders. That’s what we try to do. We look at the economics, as it exists today, and try to determine whether these economics reflect positively or whether they have turned negative. As of today, I see nothing that reflects a negative trend outside of the financial media, which, by necessity, must reflect only the negative to obtain ratings. Invest, do not speculate.

A signed picture from Joe Namath’s Jets' days and a note saying,

 “Hi Joe, 

We have a mutual wonderful friend 
in Billy Battle! Stay well pal,


I do not know if you see the trend that I am attempting to develop in this posting. While the rest of the world is projecting gloom and doom onto the economy due to the few people who have contracted this virus, everywhere you look you see great economic news. Interest rates are down substantially, allowing homeowners to refinance their homes and reduce their monthly payments, freeing up more money to consume. The price of oil is coming down dramatically and, therefore, freeing up more money for consumers to spend to improve the economy. These are huge positives no one reports.

The workforce is at full capacity making a job available for anyone that wants to work, which could not be better for the economy. Therefore, we are seeing multiple factors that are complete and total positive signs for the economy, but all are overshadowed by the incredible mirage of news about a virus that has not become that serious as of this writing. I guess it just must be a slow news time. There are no Republicans running against President Trump and the Democrats have dwindled down their proposed candidates to two. In a lot of regards, the political theater has not provided much interest as of late, so I guess the news commentators have nothing to do but report on the people who have contracted this virus; 2,500 out of 327 million.

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

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