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

From the Desk of Joe Rollins

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Regards,
Rollins Financial, Inc.

Why Are You In Such A Bad Mood?

From the Desk of Joe Rollins

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

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

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

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

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

A 30-year client turns 95!

My staff celebrating with the birthday girl.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Regards,
Rollins Financial, Inc.

Greek Tragedy 2015, Again?

From the Desk of Joe Rollins

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

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

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

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

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

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

Enjoying the summer

Practicing writing her first and last name

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

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

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

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

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

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

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

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

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

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

CNBC ranks Rollins Financial, Inc. #20

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Regards,
Rollins Financial, Inc.

Celebration of Independence Day

From the Desk of Joe Rollins

In observance of Independence Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Friday, July 3rd.

If you require immediate assistance on Friday, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com.  Our office will re-open for business on Monday, July 6th at 8:30 a.m.

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Biggest Risk to Your Retirement is Not Being Invested!

From the Desk of Joe Rollins

The month of May was a very satisfactory one for the financial markets and one which, if you were invested, enjoyed a nice benefit. While there is extreme volatility on the financial markets and every day brings financial headlines of the upcoming disaster, there once again is really no economic evidence to support that case. While certainly equity markets are significantly higher than they were a few years ago, the international markets are now contributing positive gains, and the economic trends tend to be up not down. As I have written many times previously, as long as the three major components - earnings, interest rates, and the economy - are positive, equity markets are likely to perform to our advantage.

I have a lot I want to cover in this post, but first it is important to evaluate the markets through the end of May. For the five-month period ending May 31, 2015, the Standard & Poor’s index of 500 stocks was up 3.2% for the year. Additionally, for the year, this index has returned a very healthy double-digit return of 11.8%. The Dow Jones industrial average is up 2% for 2015 and up 10.1% for the year ending May 31, 2015. Even the Russell 2000 small-cap stocks is up 4% in 2015 and up a very nice 11.4% for the one year period ended May 31, 2015. The real star in performance has been the NASDAQ Composite, which represents a great number of biotech and other tech type names; it is up 7.5% for the year and 20.8% for the one year period ended May 31st.

As predicted in prior posts, the bond market continues to struggle and the volatility in that market has become almost unbearable. There is a very interesting phenomenon going on around the world. The entire financial world is covered up in cash and there is frankly a shortage of bonds to meet that ever-growing cash need. Since there are not many bonds being issued and there is no lack of investors clamoring to buy those bonds, the market has become very tight and the float on the bonds is very narrow. With interest rates almost assuredly going up, we think bonds should be an under-weighted investment at the current time. For 2015, the Barclays aggregate bond index is up a measly 0.8% and has returned 2.8% for the one year period ended May 31, 2014. A quick analysis tells you that the S&P 500 index has returned roughly 4 to 5 times the return on bonds over the same time-frame.

Before reflecting on current economic circumstances, I have to mention the significant honor we got this week by being named in the top 100 fee-only financial planners in the United States. Remarkably, we were rated number 20 in this list of 100. This is a unique honor in that we did not campaign, we did not apply for, and we certainly did not pay to be on this list. All of the information gained by the company rating the firms was from public records and from nothing we gave them.

In order to get on this list, you have to be a fiduciary to your clients and you cannot charge commission or other fees to transact financial instruments for the clients. Since we only work on a percentage of total assets under management, we have no vested interest in recommending products, and therefore have a fiduciary responsibility to our clients to do what is best for them. I believe this is the wave of the future in financial planning. Fortunately, we were in the right category since day one, a long 25 years ago.

Also, I thought it was a good time to reflect on how I formed my financial counseling business back in the late 1980s. When I first got into public accounting, I would recommend that clients go to this stockbroker or that, this financial planner or that, in order to build on their retirement assets. I was greatly disappointed by the conflict of interest that I saw after these recommendations. Often times, I would see clients invested in funds that were totally inappropriate for them, yet with the full knowledge of the broker who recommended it. It took me years to precisely understand the biases that these brokers brought to the table. Also, I saw that these brokers and financial planners were not particularly astute in either financial, tax or insurance matters. It caused me a great deal of concern that I was recommending someone to my clients who clearly did not have their best interest at heart. They had no fiduciary responsibility to my clients at all.

The final nail in that coffin of offering recommendations was one time when a fairly well-known and now famous stockbroker in Atlanta recommended a real estate investment to one of my clients. A few years later, the investment completely fell through and his $75,000 went to zero. When I called to complain to the broker regarding the poor quality of this investment, his exclamation was “Your client is a big boy; he should have known what he signed." With that statement, I was then determined to do better by my clients.

At the beginning of 1990, I sent out a solicitation letter looking for anyone who wanted to invest money with us through our new financial counseling company. Remarkably, the next week, people mailed me checks to invest. Beginning with basically zero, we built this financial planning company from scratch, and it was certainly not an overnight sensation. But 25 years later, our long, hard struggle paid off and was recognized when we received this outstanding honor last week. Interestingly, we have close to 50 clients that have been with the investment company since its very beginning. It is fairly amazing that they have stuck with us through the good times and bad times of the past 25 years. I think it also is a tribute to the fair play and good performance we have enjoyed over this time span.

Pardon that short path down memory lane, but I wanted to explain more about how we got where we are today. While certainly we are most honored to receive this recognition, it is not without a lot of hard work over the years. As we sit here today based in Atlanta, Georgia, we currently manage over $300 million with clients virtually all over the United States, in Europe and Indonesia, with actually double-digit client representation in Los Angeles. Of course, we would not be there without our clients who support us, and we most assuredly appreciate you allowing us to manage accounts on your behalf.

There is a lot going on in the world, and much of it is extraordinarily frightening. Yes, we have the problems in the Middle East the financial crisis of Greece, and clearly we have political discourse in the United States. However, all of that is a smokescreen for investing. You should never lose sight of the bigger picture. Underneath the turmoil of the world, you have to decide what is really important. Sometimes I classify investing as the best house in a bad neighborhood, but there is always a good market somewhere.

While interest rates are clearly increasing, the level is only marginal and is almost laughably small. I think there is a good chance that the Federal Reserve will increase interest rates in 2015 by 0.25 of a point. Even at that level, they will be at historic lows and certainly not at a level to hurt the economy.

While earnings are down year-over-year, it is principally due to the energy sector. If you exclude the energy sector from corporate earnings, they are actually up year-over-year and in some classifications are extraordinarily strong. In Europe, they are posting a first quarter GDP growth for the first time in many years. The economy in Europe is slowly gaining traction, and it has a governing body that will do anything to keep it on upward trajectory.

All over Asia, you are seeing the economy pick up and things improve. We are now seeing new production coming out of China and increasing productivity in Malaysia, Indonesia and Vietnam. There is so much good going on in Asia, but it is unfortunately overshadowed by the political unrest in China and the hard feelings the U.S. has with its Asian comrades.

Clearly, the economy in the U.S. is on the upswing, however, you would not know it by reading the financial press. There is amazing growth taking place in manufacturing with the durable manufacturing index up 2.7% year-over-year. It is hard to believe the upswing that is occurring in construction. Building contracts are up close to 30% year-over-year and housing sales are up close to 9%. Even the home price index is up 4.75% for the year-over-year comparison. That is good news for everyone who owns a home.

All of this is surprising given that the GDP growth was reported as negative in the first quarter. There seems to be a lack of connection between the GDP indicator and everything you see around you. Employment is clearly up for the year, increasing almost 3 million jobs in the last year. Unemployment at 5.5% is actually quite good. When I was in college, we were taught that 5% unemployment was considered to be full employment.

Therefore, I see the economy as continuing to strengthen in spite of the dire headlines you read everywhere. Therefore, the three major indexes that leads to higher stock prices are firmly in place and I do not see that changing over the next few months.

You always have to say that a 10% correction in the equity markets could occur at any time. Due to the vast day-trading and momentum traders that we now see trading stocks, there need not be a particular reason to force the market in either direction. They systematically move stocks based upon whims, not economics. We invest, we do not speculate. We base our investment criteria on hard economic data, not current trends or sentiment- unbiased in economic reality. Every day, we hear from clients who express their fear that we are going to fall into the 2008 financial abyss. It does not take a group of economists to compare the economy in 2008 with the economy in 2015 and know that they have no similarities whatsoever.

In the area of predictions, I have another one this time. I am not exactly sure when, but I feel fairly confident that there will be a big leg up in this financial market sometime before the end of the year. It rarely happens in the summer, but it could. More likely, it will be in the fall when everyone is back at work and not enjoying vacation. You could see a major upward move during one month in the financial markets that would make the entire year 2015 very rewarding. I reflect on that fact, knowing full well that there are many people reading this financial blog that are underinvested. I see clients everyday sitting on substantial sums of cash earning virtually zero. Given that the financial markets have had double-digit returns for the last three years, sitting on cash has been a losing proposition. While certainly volatility is likely to continue, the trend is clearly up and if you are not participating, you need to be.

As we roll into the summer months, we have plenty of time to sit down and go over your financial goals and learn more about your financial life. We encourage you to sit down and visit with us and let us understand your goals, concerns and how we can work to build you a better retirement. Retirement is not built in a day, a week or a month. It is built over long years of investing, saving an understanding how money is made in the financial markets. In closing, in 2015 the largest risk to a safe and sound retirement is not being invested or even being significantly underinvested, like many of you reading this blog.


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

Best regards,
Joe Rollins

Drum Roll Please...

We’ve been telling you this for years, and it has finally been affirmed....In all seriousness, thank you for your loyalty!! We could not have done it without you!

“CNBC presents its list of the top 100 wealth management firms (fee only) in the U.S. for 2015” – and Rollins Financial, Inc. is #20!

Best Regards,
Rollins Financial, Inc.