Tuesday, May 12, 2020

Financial Markets are Buoyed By A Tsunami of Liquidity.....

From the Desk of Joe Rollins

I will be the first to admit that the last several months have been trying, not only in my industry, but for all of America. As we read the sobering statistics of the unemployed and think about their plight, we notice that the stock market is rallying, which seems to be a huge conundrum. I have a great deal to say about all these subjects that I would like to cover in this posting.

Josh Rollins & Carter Roberts - Marrying June 20, 2020

I first want to make reference to the entire U.S. response to the COVID-19 Crisis and explain, in my terms, why we will one day look back on this entire event with total disdain. I also want to try to explain why this recession is unlike any other ever seen in this country. As the title of my posting indicates, the reason why we will not see a prolonged and painful recession is the cavalry, that is the Federal Reserve, has come in to save the economy with tons of cash.

I also want to discuss why earnings have held up better than expected and why America is ready, willing and able to hire back the unemployed and to keep America rolling. As I drive by Lenox Mall every day, I note that the number of cars in the parking lot are increasing dramatically. I went by several restaurants on Saturday night and noted that the parking lots were virtually full. Once the greenlight is given, you will see the economy recover quickly, but how much damage has already been done?

And with the absolute success of the ESPN “Last Dance,” the story of Michael Jordan, I want to tell you about the time that Dennis Rodman came to our house for dinner. Dennis is featured in the documentary in many fashions, but I knew him before he became weird. Needless to say, the night he came over for dinner was very interesting.

I have much to cover in this posting and would like to try to emphasize the positives in the economy rather than the negatives. In order to do that fully, I need to give you the financial background that I think will emphasize the quick comeback and why employers want to put employees back to work quickly. One of the true indicators of the optimism seen in America today, is the performance of the stock markets during the month of April. Therefore, to summarize these excellent results, the April total returns are indicated below.

The Standard & Poor’s Index of 500 Stocks had an excellent month of April, up 12.8%. It is true that it continues to be down 9.3% as of the end of April, but still boasts a 10-year average return of 11.7% per year. The Dow Jones Industrial Average jumped 11.2% for the month of April but continues to be down 14.1% for the year 2020. Over the 10-year period the Dow Jones Industrial Average has averaged 8.7% per year. As is usually the case, the NASDAQ Composite was the best performing index of the month, up 15.5%. Year-to-date is only down 0.6% and has a 10-year average of 15% annually over the last decade. As comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.7% during the month of April, year-to-date it is up 5.4% and its 10-year average return is 4%. As you can tell, there was quite a rebound during the month of April, just as I had predicted in my last post. 
Caroline, 6, and Reid, 4 - Danielle & Robby's children

Even though my firm worked during the entire shutdown, I saw damage being done to the economy all around me and I never fully understood why we have taken such drastic actions to basically fight the unknown. Sure, we knew that this pandemic was contagious and that many people would get sick and die. We also know that each year we have similar outbreaks of flu where people get sick and die. It is always a tragedy to see actual people contracting disease and dying. It is, however, a part of everyday life.

I am not exactly sure how to read the headlines and understand what is going on. I see a great divide in the financial and business headlines between those that want to reopen America and those who want to shut it down entirely. I am not sure what the motivation is on either side. You, as an individual, have the absolute right not to go out if that is your desire. However, I am not sure why the liberal press is so adamant about not opening the economy during a time when many people are suffering from lack of work.

I have also read headlines of the many abuses in the handling of the pandemic and am flabbergasted as the true stated reason for why the lockdown was ordered is now called into question. As I understood, the principal reason for the lockdown was to save the hospitals. When we first started this discussion, the projection by the so-called experts was that the hospitals would be overrun with patients and there was no way the healthcare system could maintain any level of normal operations with the avalanche of patients that would be admitted with COVID-19 illness. What we have done is not help the hospitals at all, but essentially bankrupted them completely. 
Ava- hard to believe she will be 9 this month!

It was recently reported that the GDP fell 4.8% during the first quarter of 2020. Did you realize that almost half of that fall of GDP was related to medical related cutbacks? It was recently reported that 1.4 million healthcare jobs were lost during the month of April. Hospitals are not performing routine and elective surgeries due to the overwhelming concentration of emphasis on COVID patients. In fact, now that we are well along in the battle against the pandemic, we see all the abuses incurred during this. Did you realize that the federal government spent $660 million on temporary hospitals and most of these facilities never treated a single COVID-19 patient? In fact, some of the larger facilities have never even been completed. A good example is that the field hospital at McCormick Place in Chicago was built for $65 million with 3,000 potential beds and they only treated 37 patients. In fact, most of these hospitals now have already been closed and many dismantled.

Now I hear from some news sources that the CDC’s reporting of the COVID deaths are wildly exaggerated. As a doctor client of mine told me recently, “There is a big difference from dying from COVID-19 and dying with COVID-19.” Based on my readings, the reported deaths exclusively from COVID are 38,000 as compared to the roughly 78,000 reported in the news ad nauseam multiple times today. When I hear the explanations, I just shake my head in wonder about the information coming from the CDC.

Basically, with the advice of the scientists and not the businessmen, we were misled regarding the severity of this outbreak. Maybe you recall when Governor Cuomo of New York was pleading, almost desperately, that he needed 40,000 ventilators just in New York City. Did you realize that the maximum number of U.S. patients on ventilators never exceed 6,000 during this entire time? Throughout the entire United States, only 6,000 ventilators were in use and he wanted 40,000 in New York City alone. While WHO states that healthy people do not need to wear masks out in public, it seems everywhere I go people have masks. I guess there is just something trendy about maintaining your mask. The state of Georgia was widely criticized for reopening early. My opinion is that it was a bold move on the governor’s part, and he was reading the research more closely than the majority of Americans. I often wonder whether so much of our thought pattern relates to what we see on the national news, rather than on the research itself. This is a classic case where the media created a crisis that was probably unwarranted. Only time will tell the true story. 
Roses at the Rollins house

I also want to discuss why this recession may be not so painful. The difference in this recession is the federal government is taking unprecedented actions to soften the blow of it. In comparison, if you look at the Great Depression, there was no unemployment insurance during those days. If you were unemployed, you had nothing and every meal for the family was a real challenge. Even in 2008 when the recession occurred due to the financial crisis, millions were laid off from their work and while they received unemployment, it more often averaged $300 per week which was barely substantial for most of those unemployed. This year it is completely different.

It seems that close to 30 million will be unemployed in the U.S. shortly, if not already so. They would receive the normal state unemployment of roughly $300 per week. This year Congress and the Federal Reserve came in and funded an additional $600 a week subsidy to the unemployment. Therefore, most unemployed are receiving close to $900 per week in unemployment insurance. I have had clients in the retail industry tell me recently that it is hard to persuade people to come back to work since they have to give up their unemployment benefits where they are currently making more money from unemployment than they do at their jobs. Never in American history has the federal government subsidized unemployment to this degree. It will go a long way toward minimizing the financial ruin of the unemployed. However, this subsidy to unemployment only runs through the end of July, so workers will have to return to work to maintain a normal financial lifestyle.

In addition to the subsidy on the unemployment, there has been roughly $700 billion provided in Payroll Protection Plan loans (PPP) and Small Business Administration stimulus loans (SBA). In many of these cases, this is not a loan at all. It is an absolute grant to businesses for employers to employ people. It is important to realize that never before in the history of American finance has the federal government awarded outright grants to private businesses. During the financial crisis, they loaned several trillion dollars to businesses and banks to help them through the recession. However, those were bonified loans and all, for the most part, were repaid to the federal government. These loans to private businesses are not loans, but rather grants. The vast majority of these will be forever forgiven and it will be income to the small businesses. The assistance this will give to businesses to employ people and provide for jobs is both unprecedented and pretty remarkable. Many businesses closed by governmental action will now be offered the opportunity to go back to work. It will be all our job to return these businesses to successful operations. 
Reid and Caroline at the grave site of Bobby Jones here in Atlanta 

I am reminded of the old movie Planes, Trains and Automobiles. It is something all of us should do to help America. We need to get on a plane, train or in our automobile and go somewhere and spend some money. I can assure you there is a wealth of pent-up demand from the people staying in their house. Spending has been dramatically curtailed for the working population during the shutdown. I am positive that this pent-up demand will be exercised as soon as the coast is clear. While it is certainly tragic that 30 million Americans are out of work, we should never forget that 140 million Americans were working or being paid during this entire time and they didn’t have normal expenses they have when fully working. They weren’t spending money on restaurants, vacations, cruises or flights. They were earning the same amount of money, just not spending as much. Now they have extra money to enjoy these common pleasures.

At the height of the shutdown, I flew down to Tampa for a few days. What was quite interesting was that even though planes do not seat the middle seat any longer, both flights down and back up were full. Maybe it is just due to fewer flights on the given day. My flight back was at 7 o’clock at night and the Tampa International Airport looked like a scene from a bad movie. There was barely a soul in the airport. None or few businesses were open and there were certainly no lines. As I approached the TSA agent, I joked with him that hopefully I would not have to wait in line. His comment was, “you are my first customer”. In order for America to get back to where it was in February 2020, all of us will have to do our part and spend some money in the economy. Yes, there is always a risk of future outbreaks, but financially it is a risk we must take.
Mia and her parents, 40-year clients, practicing social distancing

For the many years that I have been writing this blog, I have consistently argued that you should always stay invested. I have argued that trying to “time” the market was a fruitless effort that no one has ever been able to accomplish. There are many that claim they have successfully sold at the top of the market and bought at the bottom of the market, but generally, after further inspection, they are just false promotional ads. This time, again, was a good example of why to stay invested. The market was moving in wild fluctuations, there were many days that the market would move 5%-6% just on a whim, and by the 23rd of March, the markets were down a full 30% from their highs reached in late January 2020. Desperation was apparent in every conversation I had with investors. How could this country possibly recover from a complete shutdown as the market was losing money virtually every day? There were those at that time that felt complete desperation and sold as the market bottomed on March 23rd, 2020.

Just as I predicted in my last posting, you have to be very careful with the Wall Street traders. The traders will force the public out of the market, and they will move back in to benefit themselves. Since the low of March 23rd, 2020, the market is up a very satisfying 31%. As we sit here today at the beginning of May 2020, many of the people who sold to cash in March have never reinvested. This is what always happens when you have a wild volatile time. They believe if you want to preserve your capital, you need to go to cash temporarily and wait to get back in. But unfortunately, they never do get back in. The fallacy of this argument is that going to cash is very easy, getting back in is very difficult. Do you get back in now that the market has rallied, or do you preserve cash and remain uninvested? If you try to “time” the market, almost assuredly you will end up a loser. Your best course of action is always to stay invested during the good times and bad.

The same thing happened in 2008. There were many in 2008 who elected to sell out of the market due to the downturn in all the financial markets. If, however, you had fully stayed invested then your portfolio would have quickly recovered. In fact, if you look at the 15-year average of the major market indexes, which included 2008, the S&P 500 Index is up 8.6% per year, the NASDAQ Composite 11.9% per year, and the Dow Jones Industrial Average at 8.7%. Once again proving that timing the market is fruitless and clearly a disadvantage to your retirement goals. Since the beginning of reporting of earnings for the first quarter, I am frankly amazed at how well companies did given the sell-off. If you look at the tech companies, most of them actually showed no damage whatsoever due to the Covid-19 pandemic. We also restructured technology in a major way. As the CEO of Microsoft, Satya Nadella, recently said, “As Covid-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months.Truer words have never been spoken.

Huge American companies over a relatively short period of time converted their operations from in-office to home successfully. I told you in my last posting that if you unleash the American spirit, it would come home successfully. This is a good example of how an entire industry was transformed in a short period of time and even though a once in a lifetime event occurred, they continued to operate successfully.

There is no question that the restaurant industry, hospitality industry, airlines, cruises, etc. will be dramatically impacted for a long period of time. However, also remember that after September 11th in 2001, the so-called experts said no one would every fly commercially again. Boy were they wrong. 

I read yesterday where future bookings for cruises were at an all-time high, which is interesting given that there are no cruise lines currently operating. The American spirit is that we will jump back into these industries given a certain amount of time. How long that will be, no one can forecast, but right now I see the GDP jumping back quickly at the end of 2020. We have to release the hospitals and let them do the work that they do. We have to free the restaurants to deal with the pandemic as best they can, but we must offer them the opportunity to survive. With the PPP loans and the SBA’s assistance, many of these companies have been given a lifeline, but only we as Americans can help them survive using their services. 
Randy Wittman, Craig Sager, Doc Rivers, Mike Small,
 Scott Hastings and Joe Rollins at Jocks & Jills

The reason the stock market has rallied recently and is likely to move higher as the year goes along is the unprecedented effort by the Federal Reserve to support the market. You had to like the quote from the Federal Reserve Chairman Jerome Powell, when asked of the fiscal response to the pandemic. As Chairman Powell indicated, “We won’t run out of money.” I think that is absolutely clear from the evidence. It looks like now the Federal Reserve will inject something close to $8 trillion into the economy this year. That is an unprecedented amount. If you compare that with the response in 2008 and 2009, the Federal Reserve injected only $3 trillion over that same time. For you to understand exactly what this means, you have to put it in perspective to what was an excellent financial year in 2019 when the S&P 500 Index was higher than 31%. If you add up net investments, dividends/buybacks, household savings, and rest-of-world-savings, the total amount of increase in 2019 was $4.7 trillion. If you consider that this year the federal deficit is likely to exceed $3.7 trillion over the course of the fiscal year, in 2020 the government is going to generate 70% of all of that just by itself.

These are unprecedented numbers that cannot be ignored. While certainly as we sit here today the prospects for the economy are bleak. However, that is not the way the stock market works. The stock market is a discounting mechanism that forecasts the future, not the past. If you assume that the market will quickly recover and if you use 2021 projected earnings, as we sit here today even after this rally, the market is not overvalued. Yes, I realize that is a bold statement. If you looked at the state of corporate America today, it would be bleak. But the market does not evaluate appropriate levels based upon today; it is six months from now. The market would not have rallied if it did not believe that corporate America would recover quickly. I am in that camp also and believe that as this year progresses, business will return to normal and the economy will be great again just as it was in early February 2020. 
Scott Hastings, #35, side by side with Dennis Rodman, #10

I promised I would relay the time that “bad boy” Dennis Rodman came to our house for dinner. During the 1990-1991 season, my client Scott Hastings, was a reserve player on the Detroit Pistons team that ultimately won the NBA championship. His roommate at the time was a rather meek and mild Dennis Rodman way before he became controversial and outspoken. When Detroit was in town playing against the Hawks, I asked Scott if he would like to come over for dinner one night and he relayed that only if could bring his roommate, Dennis Rodman. I have to be frank and tell you that I didn’t know at the time exactly who Dennis Rodman was, but of course I agreed.

The Dennis Rodman that showed up for dinner was a very soft spoken and polite guest. He was anything but controversial. That night, we had steaks of course for the basketball players, but Dennis ended up giving most of his steak to our dogs. Of course, that was his right, he was our guest. Later in the evening I had a discussion with him regarding his daughter and he cried almost uncontrollably, given that he could not see her as often as he liked. So, the next several times that the Pistons came into town Scott, Dennis and I would go out and have dinner somewhere and enjoy some stories. Never once did I find Dennis controversial, outspoken or anything other than a true gentleman. Boy, did he finally change after he left Detroit through his years with San Antonio, and of course the three titles he won with the Chicago Bulls. He must have spent too much time with Madonna. If you have not seen “The Last Dance,” be sure to watch it since it contains many personal sides of NBA players we never knew before.

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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