Fake News - Not Practiced Here.

From the Desk of Joe Rollins

I am a great admirer of Peter Lynch, the famous mutual fund investor. He has written several books on investing in the stock market, but the one that made the most impression on me pointed out that often times investment ideas, concepts, and/or economic realities seen every day are overlooked or ignored. I have found that to be true over and over again. So many people are influenced by the news (or so-called “fake news”) and pay no attention to the contradictory evidence around them. The economic aspects of the world are played out on the streets and within shops and construction companies, and should not be ignored.

I recently had the pleasure of visiting London, Paris and Edinburgh and have some thoughts I would like to share with you. So much can be learned about the world’s economic status by visiting some of the greatest cities in the world. I will share those reflections with you as well as my observations regarding economic reality in those countries.

I also want to bring you up to date on the unbelievably good economic reality we are experiencing here in the United States. All of the economic tea leaves are pointing in a positive direction. Of course, there are significant geopolitical events, but you cannot invest around “what might be”. You must invest based upon what you are looking at currently. It is important that you can differentiate between the fake news as reported on many internet services and national broadcasts, and the real economic evidence that is all around us.

First, I need to report on the month of June, which was basically a flat month. However, the overall six-month period ended June 30, 2017 was quite impressive. We have enjoyed a massive move up in the financial markets since the election of the new President, and all of the major market indexes were very favorable over this time period.

The Standard and Poor’s Index of 500 stocks was up 0.6% for the month of June and has enjoyed a 9.3% year-to-date performance and a one-year performance of 17.9%. Interestingly, the index was the lowest performing index over the major ones for the one-year period then ended. The Dow Jones industrial average was up 1.7% for the month of June and is up 9.3% for the year-to-date in 2017. It has also enjoyed a quite handsome 22.1% increase for the one-year period ended June 30th. The NASDAQ Composite was actually down for the month of June 0.9% but it is the best performing index up 14.7% year-to-date in 2017 and up 28.3% for the one-year period then ended. The top performer in the month of June was the small-cap Russell 2000 which was up 3.5% for the month of June, but has had a disappointing year in 2017 up only 5% for the year but up a very handsome 24.6% for the one-year period ended June 30th. The Barclays aggregate bond index was negative for the month of June, up 2.2% for the year-to-date, but negative for the one-year period ended June 30th, a 0.6% loss.

Paris

Edinburgh

London

Economic news has turned out to be very good in 2017. On Friday, they announced the June employment numbers and they were quite extraordinary. Nonfarm payroll had expanded by 222,000 in the month of June and the jobless rate was fixed at 4.4%. As we have mentioned often times in these postings, unemployment of 5% or lower would by all standards define full employment. There is also much going on in the interest rate cycle that is affecting fixed income investors. The Federal Reserve has recently expressed their concern about a stock market that continues to go higher and has reflected that they would like to increase interest rates dramatically as the year goes on. Of course, they counter that with the opinion that if inflation does not increase and the job market stays reasonable that interest rate increases could be delayed longer than this year. It is very clear to me that the Federal Reserve has a high desire to increase interest rates and is likely to do so by the end of this year as well as a couple of times during 2018. However, even at this level, interest rates are still extraordinarily low and it is unlikely that there would be any major effect on the equity markets until interest rates were well above 3%.

However, there is great displacement occurring in the credit markets (bond investing). As an example, this month the benchmark German 10-year bond yielded more than double from its recent lows. It is now an 18-month high at 0.58% as of this past Friday. Please note that although the German 10-year bond has doubled in recent weeks, it still has a yield of only one half of 1%. If those types of yields do not encourage stock market investing, nothing else will. Likewise, in the United States, yields have jumped up dramatically on our 10-year treasury bond, and, as of last Friday, closed at 2.39%. What is important to understand regarding this 10-year treasury is that almost exactly one year ago the treasury was yielding a lackluster 1.37% and in that one-year period has moved up to 2.39%. Despite how much you know about the credit market and bonds in general, interest rates are usually a good indicator of future economic activity. As interest rates increase, a stronger economy is being predicted, so the Federal Reserve tries to slow it down to a more reasonable level. This upward movement of interest rates also tells you that a recession is unlikely.

There has been much in the news lately regarding fake news. Every morning when I get up and read the headlines on Yahoo, I am just blown away. Did you realize that when President Trump has people to the White House, he gets two scoops of ice cream and everyone else receives just one? Really?! Now, that is the type of news that can really move the needle economically. I read almost daily on this website that the number of people in America that would like the President impeached is greater than his approval rating. I am not exactly sure where that survey was compiled, but I am willing to bet that its authenticity is in question. But again, maybe it is these headlines that are so confusing to the investing world which creates the uneasiness that investors feel.

It is much more important to look around you and see the economic reality of what is actually going on as compared to what is reflected. There is nowhere in Atlanta that traffic does not dictate your every movement. Everywhere you look, construction is ongoing, even in downtown Atlanta. This would not be the case if economic activity was down.

I just got back from London and Paris and both of those cities are covered up by tourism. Around Westminster, you can hardly walk the streets due to the number of tourists visiting. In Paris, the line to tour the Eiffel Tower winds around the block. Everywhere you look, tourists control ever restaurant, hotel, museum, and tourist attraction. Despite what you might suspect, the fear of terrorism is not deterring visitors from all over and the tourism industry is continuing to boom. It does not take a rocket scientist to realize that tourism would not be at all time levels if economies around the world were not in strong economic conditions.

President Trump recently criticized Germany’s Chancellor, Angela Merkel, by exclaiming that Germany was not a good trade partner with the United States. Of course, as always, the press widely criticized our current President with the exclamation that Germany was a strong ally of America and any criticism of Angela Merkel was sexist, uninformed or just downright nasty. I am here to tell you that I saw with my own eyes that President Trump was correct. If you drive around Atlanta, you do not have any problem finding an overwhelming supply of international cars. Mercedes, BMW, Volkswagen, and of course the Japanese automobile makers probably sell 50% of all cars actually sold in the U.S. However, in London and Paris, you see zero American cars. There are no Fords, Chevrolets, Buicks, or any type of American cars in London and Paris. Virtually all of the cars are either European made or are from Japanese manufacturers. That is exactly the point that the President was making, which was missed by the general press.

The point is that it is perfectly okay to import cars into the United States, but you must let us export them to Europe. If you are going to restrict our cars coming into your country then we must restrict your cars from coming into our country. It is such a basic concept that I am amazed anyone would have an issue with it. We are not talking about open trade – everyone votes for open trade. What we are talking about is equal trade. If you charge our goods a tariff, we will charge your goods a tariff – and frankly, it is already happening.

Around the world, companies are looking to come to the United States to manufacture since there will be obstacles put in place for countries that do not trade fairly. The fallout of this will clearly be a benefit to American employees as you will see more manufacturing jobs in the United States. The President recently announced plans for exporting liquefied natural gas to Poland. It is hard to fathom that anyone could criticize us exporting natural gas, creating fabulous new jobs in America and providing Europe with a commodity they desperately need at a competitive price. These types of subtle changes in the way business is transacted will greatly enhance America’s economy in the upcoming years.

As for the stock market, it would not surprise me to see flat summer months. We have had an extraordinarily good run in the last six months but a flat summer would certainly not be surprising. However, I feel very strongly that the market will end up higher at the end of the year than it is today. Almost every day I am approached by investors who want to know about the ultimate pullback. First off, there is no economic news anywhere to support a pullback. Yes, there are geopolitical concerns that none of us can forecast and certainly none of us can invest for going forward. However, if the economy is an indicator of the stock market, there is clearly no downdraft in place.

There are so many investors that have missed this run up in stocks who are dying to get reinvested. When you see a 20% return over the last year and you have been sitting in cash for that one-year period, the last thing you want to do is admit that you have missed a major financial opportunity. If the market would pull back 3-5%, it might actually give these people back into the markets and they would jump in and be fully invested. I am sure it sounds strange to hear me say a correction is a good thing, but at the end of the day maybe a small pullback could lead to a larger move forward in the coming months.

As we close the second quarter of 2017, it appears that the earnings are projected to be up roughly 8% on the S&P 500 Index companies. That is after a 15.3% increase year-over-year in the first quarter’s earnings. It was recently announced that the GDP growth for the first quarter was 1.7%. It is difficult to perform an analysis that would not make you believe that the GDP for the second quarter would be closer to 2.5%. And we are not the only ones enjoying prosperity. For the first time in a decade, it appears that Europe is going to have a positive solid GDP growth. Japan is also higher and Asia, as a whole, is on fire. The one thing that will always baffle me about investors is that they focus on relatively minor news to form economic forecasts when it is very simple to focus on the following three questions: Are interest rates still low? Are earnings still good? Is the economy solid? As pointed out above, all three of these major market forecasters are very much positive at the current time.

I could write a whole blog regarding dangers to the U.S. economy. However, none of those dangers are things that we can forecast today. What we can forecast is what the economic cycle is at the current time. Might there be recessions two to three years out? Of course, there might be, but that would give us a long time to react with your investments between now and then. For the current time, the market appears to be stable and moving higher. I always wonder how people who have sat in cash for the last couple of years justify that position. I guess that is the old thought that you can justify your actions with some sort of negative assertion. However, unequivocally they have been mistaken. As always, we invite you to visit with us so we can make sure you are on the right path to meet all of your goals.

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

Best Regards,
Joe Rollins

Happy 4th of July!

In observance of Independence Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, July 3rd and Tuesday, July 4th. We will re-open for business on Wednesday, July 5th at 8:30 a.m.

If you require immediate assistance on Monday or Tuesday, please contact Joe Rollins at 404.372.2861 or jrollins@rollinsfinancial.com. 

Please be safe, and enjoy the holiday! 

Best Regards,
Rollins Financial, Inc.

Georgia Qualified Education Expense Tax Credit

In 2008, the Georgia General Assembly passed the Qualified Education Expense (QEE) Tax Credit bill and it was signed into law by then Governor Perdue. This law provides for the creation of student scholarship organizations (SSOs) to which Georgia individuals and corporate taxpayers can contribute in exchange for a state income tax credit and potential federal charitable income tax deduction. Please do not confuse this with your child’s tuition if they attend one of the participating schools – taking advantage of this donation tax benefit will not help reduce their tuition. What this does mean is that you can potentially offset your Georgia tax liability dollar for dollar for making a charitable contribution to a participating school, for which you will also receive a federal charitable donation deduction. That sounds like a win-win-win to most of us. There are some key items to note, discussed below, but overall, this program is increasingly popular for a reason.

To get started, you must submit a tax credit application to the qualified Georgia SSO of your choice. And the time to do that is now. Two of the more popular SSOs, The Georgia Goal Scholarship Program, and Grace Scholars began and will begin accepting applications on June 1 and July 1, respectively. You can apply anytime from the SSO’s opening day through December, 2017.

Collectively, all applications received during 2017 are then submitted by the SSO to the Department of Revenue (DOR) on January 1, 2018 at which point the DOR will dole out the tax credits. For 2017, there were $58 million dollars in credits that were used up on January 1st! So, it is imperative that you get your application in to your SSO before the end of the year. It used to be a first-come, first-served program, but in order to equalize the credit distribution, they consider all applications turned in on January 1st together. This means that you most likely will not be approved for your full contribution, but you should be approved for a portion of it.

By the end of next January, you should find out your approved amount and then you must make your payment within 60 days to validate your contribution. This allows you to take your charitable donation and Georgia credit for the 2018 tax year when you file your returns in 2019. Seems like the deduction and credit is a long way away from your submitting your application today but this program has been so popular, it is necessary to begin the process this far out. If you went through the process last year, or this year, then you most likely just utilized your 2016 credit and you will get to utilize your 2017 credit when you file your returns in early 2018 – around the same time you are making your 2018 donation.

If you are new to this game, or even if you are not and just need a refresher, there are some things to note:

1. There are limitations on the amount that you can take as a tax credit. These are the limitations:
   
   • Single individual or head of household – up to $1,000
   • Married couple filing a joint return – up to $2,500
   • Married couple filing a separate return – up to $1,250
   • S corporation shareholder, LLC member, or partnership partner – up to $10,000
   • C corporation or Trust – up to 75% of annual Georgia income tax liability
   And like we mentioned above, these are the limits for which you can apply. Given the popularity of the program, you will likely only be approved for a portion of your application amounts. But something is better than nothing.
   
2. You can specify which school you want to receive your donation from an approved list. The SSOs maintain a list of qualified schools from which you can choose. And the school may be able to tell you if they are participating and if so which organization to use.
3. Keep in mind, that you are applying for an amount to offset your Georgia tax liability. If your contribution amount exceeds your Georgia income taxes, you can carry your credits over for up to 5 years.
4. You are entitled to a federal charitable contribution for your donation. And for anyone that typically pays alternative minimum tax (AMT), charitable donations are one of the only itemized deductions that are fully allowable under the AMT calculation. You must adjust your Georgia charitable deductions so that you are not double dipping, but hey, you are getting a Georgia tax credit which is even better.
5. If you pay Georgia estimated taxes or have Georgia withholding, you can most likely adjust those amounts to reflect any approved tax credit amount to cover the contribution cost.

Those are the basic details in a nutshell. There are definitely more complex issues that we would be happy to review with you on an individual basis. For example, if you are an owner of a pass-through entity and want to make sure that you can apply for the full $10,000, let us know. And by the way, if both spouses are members of pass-through entities generating substantial income, you can potentially apply for a $20,000 credit.

In our opinion, this is a great way to check the box for a charitable donation to assist with school scholarships while offsetting your potential Georgia income taxes. Please do not hesitate to contact us with additional questions or if this is something that could be beneficial for you. We look forward to hearing from you.

Best Regards,
Danielle Van Lear

Sell in May and Go Away - but where are you going to go?

From the Desk of Joe Rollins

Josh and Ava

Reid and Caroline,

Children of Robby Schultz, Partner of Rollins Financial,

and Danielle Van Lear, Partner of Rollins & Van Lear.

The saying above has been around since I started reading the Wall Street Journal in the 1970s. The presumption was that the best traders on Wall Street would sell in May and go to their Hampton resorts and sit out on trading for the summer. They would come back after Labor Day and get reinvested going into the end of the year. There were many that argued that the best months in the stock market were always November through May because this was when the active traders on Wall Street were around to cut deals in back rooms and invest in stocks.

Those days are long gone. Now, momentum trading occurs daily. Millions, if not billions, of shares are traded by machines that exploit pricing errors on stocks, and are thankful for a gain of a cent or two. In fact, the vast majority of all shares traded on all major exchanges are done by momentum traders, not human traders. I do not say that with criticism of these investors as I have studied and read books on the subject, and I can find no real harm that they cause. In fact, they even may provide a service. They move markets and stocks when there isn’t enough volume to do so. One thing is crystal clear. The old days of stock traders cutting deals in the back room to exploit the market for their own benefit and against small investors like you are as dead as the old proverbial buggy whip. That is a very good thing.

Once again, I have to report that the month of May was an extraordinarily good month for investing. The Standard and Poor’s Index of 500 stocks was up 1.4% for the month of May and up 8.7% for the five months ended May 2017. It is also up 17% for the one year period ended May 31, 2017. The NASDAQ Composite was up a banner 2.6% for May and is up 15.7% year-to-date. For the one year period, it is up a sterling 26.7%. The Dow Jones Industrial Average was up a meager 0.7% for the month of May, 7.5% year-to date and up a very strong 21.2% for the one year period then ended. Just for purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.7% for the month of May, 2.2% for the year-to-date and 1.4% for the one year period ended May 31, 2017.

To answer the title of this blog, I thought I would go through a few asset classes to see if I could solve the age-old question, “If you sold in May, where would you go?” What is interesting now is that the economy is starting to pick up and the anticipation of lower tax rates, capital improvements to our roads and bridges and the expatriation tax are all fueling the market higher, contradicting the so-called “experts” that you see daily on the financial news.

Let us briefly look at the other asset classes:

1. Cash – Over the last several months as bond rates have increased, the earnings that money market cash accounts earn has gone up. About this time last year, cash was earning virtually zero, but now it is up 0.8% annualized and roaring ahead to a 1% annualized yield. Just for comparison, I would point out that the S&P 500 Index made 1.4% for the month of May, nearly twice the current rate of cash on an annualized basis. However, most people that are holding large cash balances are not doing so in money market accounts. They do so in non-income producing checking accounts under the misguided presumption that you need an emergency fund. That may have been true in the days before lines of credit on your house, credit cards and other investment accounts were around to provide a safety blanket. Holding cash in a non-interest-bearing money market account at the current time has no economic benefit.

2. Residential Real Estate – I am always baffled by people who obtain wealth suddenly want to own real estate. It could be for a number of reasons for their wealth such as inheritance, sale of business, life insurance or other new-found wealth. The one thing they almost always purchase is more residential real estate. I never understood why a couple would need a 10,000 square-foot house in the $5 million range. First off, someone would have to clean that house, which would be expensive. Second, the number of people that can actually afford that house is virtually nil. However, that is the first thing that wealth seems to want. It actually goes back as far as Gerald O’Hara’s famous quote to Scarlett in Gone with the Wind, “Why, land is the only thing in the world worth working for, worth fighting for, worth dying for, because it’s the only thing that lasts.”

In any case, residential real estate is currently borderline bubble territory. There is very little available residential real estate to purchase, and what is available to purchase is extraordinarily high-priced. As with every residential real estate boom and bust that I have seen, just as prices reach high levels, contractors flood in to build homes to satisfy this desire. In my 40 years of living in Atlanta, I have seen many residential real estate booms and busts. Almost invariably at these levels, you see the supply of houses increase and the value of houses decrease. The law of supply and demand. I am not suggesting that it would happen overnight, or even in the next few years. But I do know when the price of houses gets so expensive that the average homebuyer cannot afford to purchase, you are at the very top of the market and there is likely to be a downward trend for years to come. So, we are today.

3. Bonds – Every day I talk to clients about investments and bonds. You will find countless textbooks that say you should be invested in bonds based on some hypothetical age – however, I beg to differ. The Federal Reserve has already announced that there will be at least three interest rate increases during 2017. Currently, interest rates continue to be at all-time lows with a current 10-year Treasury note at 2.16%. But we also know that the labor market is outstanding, the economy is growing significantly and that the Federal Reserve is moving interest rates higher. At the current time, the position in bonds is more likely than not to produce a negative or marginal rate of return in the upcoming year, as it has over the last one-year period.

4. Commercial Real Estate – Of all the asset classifications in the real estate arena, commercial (non-residential) real estate probably has the greatest potential. Rents are just now beginning to catch up with the economy and are likely to increase. Since the average investor cannot invest in commercial real estate except through other entities, I will not bother to discuss these in greater detail.

5. REITs, Hedge Funds and Oil Pipeline ETFs – REITs have had an incredible run over the last year, but that has ended. With rising interest rates and the beating that retail shopping centers are currently taking, it is not likely that REITs will have much of a return going forward. Hedge funds, by all standards, have been a tremendous bust. Even though I review the reported results of hedge funds on a daily basis, most do not even come close to the financial returns of the S&P 500. In my opinion, the oil industry is going to be slow-growing for years to come. The advancement of technology in oil has revolutionized the industry, and going forward, the demand for oil will be well below the supply produced by the companies that frack oil in America. There is a great amount being done with Hybrid cars. Increased mileage and no need for oil coupled with the oversupply of oil around the world, I suspect to see oil prices depressed at this level for at least a decade. I am not surprised at all that some of our friends in the Middle East are suffering from an economic meltdown. We knew it was going to happen at some point, but no one expected it would last this long. And now they too are suddenly cutting corners and pinching pennies. It could not have happened to a nicer group of investors.

As for the stock market moving forward, there is excellent potential. As the first quarter comes to an end, earnings for the first quarter on the S&P 500 were 14% higher than the same quarter last year. The much-respected Federal Reserve Bank of Atlanta is now predicting the GDP growth in the second quarter will be 3.4%. Didn’t I just hear on T.V. last week from almost a consensus of democratic congressmen that 3% growth was unattainable?

The unemployment report from last Friday was nothing short of spectacular. With an unemployment rate of 4.3%, almost all of America is now fully employed and when you have employment, you have consumer spending. Basically, the U.S. economy is at full-employment and throughout the U.S., employers are reporting the lack of qualified employees to fill positions. Of course, there are isolated pockets of unemployment, but in the good manufacturing markets, unemployment is down close to 3.5%. Something is going on in manufacturing that no one has forecasted and can only be good for the stock market.

You may remember that many forecasters said that Hillary Clinton was a “slam dunk” to win the election. I might have even said that myself. One of the things that they all agreed upon was that you could not stop illegal immigration in the United States. I guess the news that illegal immigration has slowed to a trickle into this country would be surprising. It is interesting to me that it was not necessary to build a wall, but to simply enforce the laws that currently exist.

The rest of the world is rushing to manufacture in the United States. There is a simple reason that the current administration continues to enforce fair trade rather than open trade. Over the next ten years, we will see an explosion of foreign manufacturers in the United States in order to avoid tariffs, making the manufacturing outside of the United States unprofitable. This is a great thing for the U.S. and for U.S. employment.

Therefore, the three important components of higher stock prices are clearly and unmistakably in place. Interest rates continue to be extraordinarily low and earnings appear to be excellent and getting much better. Most importantly, the economy is strong and getting stronger. Therefore, the trifecta of economic importance of higher earnings is firmly in place, and I expect the market to trend higher going to the end of the year.

Every day I meet with potential investors who state that they do not want to experience another year like 2008. Believe me; I would not want that either. However, if you look back at the economy in 2008, which was experiencing a financial meltdown, as compared to the economy today, how could you even contemplate that the stock market would perform at the same levels? Back then, the economy was fragile and breaking; today, it is strong and soaring. There is zero comparison between 2008 and 2017.

This morning, I heard someone on T.V. exclaim that it would be hard for the market to rise since there is such a high percentage of financial resources allocated to stocks. Actually, the exact opposite is true. In 1998, 60% of adults in the U.S. were invested in the stock market. In 2008, 65% of those adults were invested. Yet today, less than 54% of the U.S. population is invested in stocks. There is an avalanche of money, cash and resources that will come into this market over the next few years. This will create a backstop for any swift decline. While you will certainly see swings up and down as we move forward, I fully anticipate that over the next year markets will be higher than they are today. The one thing I am confident about is that if you have a 20-year period before you actually need the money, the markets will be significantly higher than they are today.

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

Best Regards,
Joe Rollins

Happy Memorial Day!

In observance of Memorial Day, the offices of Rollins Financial and Rollins & Van Lear will be closed on Monday, May 29th. Please note that all major U.S. stock exchanges will also be closed in honor of those who died in service for our country.

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

Joe Rollins at jrollins@rollinsfinancial.com
Robby Schultz at rschultz@rollinsfinancial.com
Eddie Wilcox at ewilcox@rollinsfinancial.com

Please be safe, and have a great holiday weekend!

Best regards,
Rollins Financial, Inc.

Stocks are expensive under normal times - these are not normal times.

From the Desk of Joe Rollins

I make it a point to watch the news every evening at 6:00 p.m., even though it is quite difficult to wrestle the T.V. remote away from my beloved daughter and her cartoons. Often times after watching the news I scratch my head to understand exactly what they are discussing and why. Clearly, these viewers of the nightly news are not seeing the positive economic benefits that can be found everywhere. I also read the headlines on Yahoo on a daily basis and think, “What cave do these writers live in?” The economic news is so overwhelmingly positive at the current time that it should be difficult for any writer not to see the clear and convincing positive economic tea leaves.

I will deal with some of the issues that the opening paragraph contemplates later, but first let me report the extraordinarily good news of the stock market. For the month of April, the Standard and Poor’s Index of 500 Stocks was up a nice 1%. Year-to-date, it is up 7.2% and for the one-year ended, it is up 17.9%. And by the way, that is the worst performing index of the major U.S. indexes. The NASDAQ Composite was up 2.9% in April, 12.7% year-to-date and 28.2% for the one-year period then ended. The Dow Jones Industrial Average was up 1.5% in April, 6.7% year-to-date and up 20.9% for the one-year period ended April 30, 2017. Just to give you a basis of comparison, the Barclays Aggregate Bond Index was up 0.7% for April, up 1.5% for 2017 so far and has a one-year total performance of 0.5%. Notice I did not say 5%, I said one half of 1%, or 0.5%, for the one-year period then ended. How anyone could make a positive recommendation for bonds in this environment and keep a straight face is quite beyond my ability of comprehension.

From a personal standpoint, I have been very busy this year with tax season and other matters. The first weekend in May was quite an extraordinary time. My son, Joshua, graduated from Auburn University with honors from their business school – maybe one day he will work here. Simultaneously, my daughter, Ava, graduated from kindergarten. Yes, I know there is a big difference between age 22 and age 5. However, both were significant and certainly events to be celebrated. Josh is now moving on to graduate school at Auburn while Ava ventures into the excitement of her first year in real school. It is an exciting time for everyone. Congratulations to both for a job well done!

Josh and Ava

Dakota, Ava, Josh and Joe

Danielle, Robby, Joe and Eddie
Partners at Rollins

I would like to cover some of the positive economic events and go over some items that you may have missed due to all of the negative headlines that confront us every day. As the headline of this posting indicates, no one could argue that stocks are cheap today by historic standards. Prices today are roughly 21 times earnings, which is not terrible if you compare that with the average of 19.2 over the last 25 years. Certainly, not outrageously expensive, but certainly not cheap. However, those numbers do not explain why stocks continue to climb. With the low interest rates that we enjoy today, even Warren Buffet comments, “Measured against interest rates, stocks are on the cheap side compared to historic valuations.” Basically, this statement is a firm grasp on the obvious. If you can only get zero interest in your money market account, but a vanilla index such as the S&P 500 generates a dividend return of 2.2%, why would you ever invest in cash? Basically, that is what the richest man in the world is questioning. I question it every day and in return I get blank stares from potential investors who do not find it as obvious.

Some of the following items are clearly controlling the upward trend in the markets. Have you even for a second considered the potential of the economic benefits of repatriation of foreign earnings to the U.S. For reasons too technical to explore in this short article, U.S. corporations that earn profits overseas are not taxed on those profits until they are brought back to the United States. At the current time, to do so would create a 35% tax, which is prohibitive and therefore those profits are not being brought back home. Under the proposed bill to reform income taxes in Congress, there would be a special rate of 10% to encourage U.S. companies to bring those profits back to the U.S.

It is now believed that roughly $2 - $3 trillion (not billions, but trillions) are parked in overseas accounts that would be tempted to be repatriated. Let us assume that $2.5 trillion is repatriated back to the United States, generating a cool tax bonus of $250 billion (a 10% tax rather than the current 35%). If you want to know the way that the infrastructure in the U.S. could be reformed, there it is in one sentence. A tax of $250 billion specially allocated to major interstates, bridges, airports, naval ports, airline software, navigation and upgrades. Can you even envision how many U.S. workers could be employed under this one simple provision mentioned above?

That is the obvious solution to many of the problems with infrastructure, but think about what happens to that repatriated money. U.S. corporations would be encouraged to make acquisitions at improving stock prices, paying dividends to shareholders, buying back stock, etc. Each and every one of these actions would create higher income taxes to the Treasury, thus improving the deficit. If the U.S. based companies were to bring back this cash to the United States, pay an appropriate amount of tax and then use that money to expand their businesses, virtually every aspect of the U.S. economy would be improved. This is one of the reasons that the stock market climbs in the face of the overwhelming negative news that surrounds us every day. Maybe “fake” news.

The economic news for the month of April continues to be good. The U.S. economy produced 211,000 jobs during the month of April and the unemployment rate was down to 4.4%. As I have often relayed in these postings, when I was in college, they taught us that 5% unemployment was considered full employment. Today, the unemployment rate is significantly below that 5% level at 4.4%. I know many employers seeking current employees that post jobs and are getting zero responses. It has been a long time since I have personally seen excess jobs with not enough people to fill those jobs. That is a great sign for the economy. So much of the negative news on unemployment has been focused on the U6 unemployment rate. For the technically challenged, that means underemployed. Even that fell to a post-crisis low of 8.6%. You may recall that in the height of the 2007-2008 recession, that rate was a stunning 16%. Over the last one-year period, there have been 3 million new jobs created, putting these people to work, along with their families, relatives and local merchants. The economic news on unemployment could not have been better.

Most of the largest companies in America have finished reporting earnings for the first quarter of 2017. At the current time, it now appears that the first quarter profits of 2017 will be higher than the first quarter profits of 2016 by a very impressive double digit increase. My statement above regarding the prices of stocks being somewhat higher than the historic average of the last 25 years does not contemplate a double digit increase in earnings as we go forward. That is past earnings, not future earnings. If you build into your models an increase in corporate earnings by double digits, by any historic standard, stocks are cheap.

But the best economic news I will save for last. It is my opinion that the news of the upcoming tax reductions will have an economic effect only matched once before in this country. If you think earnings of U.S. corporations are good now, factor in an income tax rate decrease from 35% to 15% and you will see corporate earnings explode upward. How could the stock market ignore the potential for overnight corporate America to receive a benefit to their bottom lines by reducing corporate tax rates? If you modeled in a 10% increase in earnings as mentioned above plus an almost 50% cut in income taxes, all of a sudden, the price to earnings ratio of corporate America is no longer 21, but 15 – much below historic standards!

We should also put to rest any doubt that the economic theory of bigger government and higher taxes practiced over the last eight years is dead and the economic proof is not only overwhelming, but resounding. Economic growth over the last eight-year period was an astonishing low 1.47%. In all the other recoveries from recession, the economic growth has been 3.4%. There are many that believe that this low growth was exaggerated by higher income taxes forced on the economy, a much higher level of administrative oversight and an astonishing lack of economic stimulus during this eight-year period. You may recall that tax rates were increased dramatically under the Obama years. Federal revenues were supposed to rise by $650 billion over the following decade because of the 2013 tax increase; however, that was not an accurate forecast. Revenues are now projected to fall by almost five times that amount because economic growth continues to falter. Therefore, in everyday terms, it is the consensus of most that if you increase taxes, federal revenue should grow but in reality, an increase in taxes draws down growth. Rather than an increase in revenues to the Treasury, it actually falls.

Go back to the years preceding Ronald Reagan’s presidency. From the period 1974 through 1980, GDP growth was 2.5%. Clearly, the country was in recession and inflation was high when President Reagan took office in 1981. However, one of his first moves was to cut marginal tax rates, increase defense and cut entitlement spending and reduce the regulatory burden. I am unsure whether or not you have noticed, but this is the exact strategy that President Trump is following. Once those policies were in place, economic growth averaged 4.6% during the remainder of his presidency. More importantly, federal revenues grew at double digit rates during four of his last six years in office. Now compare the economic record of the Reagan years with the economic record of the Obama years.

So, the biggest economic news going forward is the potential that economic growth would make up for the reduced rates, and therefore whittle away at the current huge deficit. But there is also unbelievably good news regarding employment in the U.S. President Trump’s attempts at creating better trading patterns with the rest of the world have already shown fabulous economic benefits. Countries around the world are now spending money in the U.S. to manufacture as well as employ U.S. workers. If you gave them the 15% tax rate in the U.S., you would see an overwhelming flood of foreign companies creating jobs in the United States. You would also see U.S. companies bringing manufacturing back to enjoy this 15% rate. Good times are coming – watch and see.

We talk daily about a so-called border tax, but no border tax would be needed if we had fair economic policies around the world. As an example, virtually all of the shrimp sold in the United States is imported from China, Indonesia and their bordering countries. They import that shrimp at virtually no import tax. However, U.S. fisheries cannot export into China without a 30% tax. If you equalize those rates, economic expansion will occur on both sides.

Over the weekend, China announced that once again, U.S. manufacturers can ship meat into China. If you do not realize that concession by China was not of their making, you do not understand economic pressures that the U.S. can have on the rest of the world. We all believe in free trade, but it has to be fair trade. I think the current president has proven that if you threaten foreign countries with no free trade, but equal trade, they will manufacture in America rather than in their own countries. The economic growth of the U.S. drives the economies of the world, since they all export to America. If you have equal trade, it would be much more beneficial for them to produce here than at home.

As I sit and watch the endless debates on totally irrelevant subjects by Congress, I wonder who understands this nonsense. Other than politicians, who really cares who the FBI director is? Who really cares about who insulted who? What I care about are economic results and they are happening at the current time. If legislative policy follows the predictions made herein, now may be the finest buying opportunity in equities that we have seen in our lifetime. Yes, I understand that is a bold statement. However, if you are not invested, you will never benefit.

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

Best Regards,
Joe Rollins