“Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves.” – Peter Lynch

From the Desk of Joe Rollins

Probably a great deal of the investing public has never heard of Peter Lynch. During my formative years of investing, he was the most famous investor of all time. Peter Lynch ran the Fidelity Magellan Fund for 13 years with an average gain of 29.2% and had unparalleled success. Even in the stock market crash of 1987, Fidelity Magellan Fund had a positive return. I think his advice above is very important today as we face a recovering economy and an earning explosion.

I became curious as to why so many investors are unwilling to invest more money during this time, so I did an informal survey to find out exactly what is bothering people and preventing them from investing. I got many responses, but most of them centered around the potential increase of inflation, the wild and crazy spending in Washington whether the economy is actually recovering, a potential increase in interest rates by the Federal Reserve, and a basic misunderstanding of corporate earnings.

Ava posing with her 10th birthday celebration signs

I have decided to address these issues, so my readers understand exactly where I stand. I also want to give you information regarding the recovery of the economy that is in controversy. It is so absolutely crystal clear to me that the economy is exploding on the upside, that it is fascinating to me that so many people continue to question it. Also, I want to discuss general investing policy and how that affects your potential retirement. I always like to quote the famous investor Warren Buffett, when he said “Do not save what is left after spending, spend what is left after saving.” I intend to cover all those subjects and hopefully convince investors that many of the fears expressed above are either temporary or completely misplaced.

Before I do so, I need to reflect on the performance of the financial markets for the month of May. As you know the year 2020 was an extraordinary year on the upside for the markets. It has also continued into 2021 with the markets continuing to rise. One of the oldest sayings on Wall Street is, “Sell in May and go away.” I think if you follow that advice over the summer months, you may miss a good opportunity.

The Standard & Poor’s Index of 500 stocks was up 0.7% in the month of May and is up 12.6% for the year 2021. The one-year performance on this index is an extraordinarily high 40.3%. The NASDAQ Composite was down for the month of May 1.5% and is up 7% for the year 2021. The one-year performance on this index is a 45.9% increase. The Dow Jones Industrial average was up 2.2% during the month of May and is up 13.8% for the year 2021. The one-year performance for the Dow Industrial is also an outstanding 38.6%. Just for the sake of comparison, the Bloomberg Barclays Aggregate Bond index was up 0.2% in May, but is down 2.5% in the year 2021 and is also down for the one-year performance at negative 0.7%.

Kari and Adam’s engagement photoshoot before their June wedding

If you compare the three major market indexes, which were up 38% or higher over the last year, you can see that the bond index was a major disappointment, reflecting a negative return for the one-year period ended May 31, 2021. One of the major reasons for concern for investors is that they believe that inflation will soon impact virtually every item we purchase and every commodity that is essential for the everyday budget. There is no substantial evidence that inflation will impact the economy this quickly. In fact, if you go back and review the history of inflation, you will realize that it takes many years to actually affect the economy in general.

I was here in Atlanta during the 1973 oil crisis. Most people do not even remember that the reason that crisis occurred was because OPEC, “Organization of the Petroleum Exporting Companies,” decided to withhold oil from all the countries that supported Israel during the Yom Kippur War. Basically, the OPEC countries decided that they would not sell oil to the United States during this time period and correspondently, the U.S. suffered through a substantial decline in its oil imports and a substantial increase in price. During that time, the use of oil affected so many different aspects of the American way of life it forced prices up almost immediately. The price of oil went up almost 300% from $3/barrel in the U.S. to nearly $12/barrel.

I can vividly remember standing in line to purchase gasoline during that very difficult time. I also recall the dramatic increase in the price of a gallon of regular gasoline which rose 43% from 28.5 cents a gallon in May 1973 to 55.1 cents in June 1974. Just looking at the above numbers you would think that inflation would impact the United States almost overnight. But history reflects something else.

It wasn’t until the late 1970’s (6 years later) that inflation really became a serious financial issue for the American economy. Yes, we had inflation prior to that time and went through ill-placed actions by the government to hold down prices, which was unsuccessful. However, it really got out of control during President Jimmy Carter’s years, when double digit inflation was commonplace. The point of this scenario is that it takes years to impact the economy with significant inflation. I think we are seeing that reflected today. Even though prices are moving up, inflation in the economy is almost assuredly an event that will be years from now before it will affect and hurt the U.S. economy. It even looks like some of the prices have already started to moderate.

You also see it in the words of the Federal Reserve members that are most influential in controlling interest rates. The most important regional bank in the Federal Reserve is the New York Federal Reserve. Its President, John Williams, recently said we are “Still quite a ways off from maintaining substantial further progress.” Basically, what he quoted was a reflection of Federal Reserve’s Jerome Powell’s many statements saying that the economy has yet to overheat and, therefore, any changes by the Federal Reserve at the current time would be unwarranted.

There is also a clear misunderstanding of how inflation impacts financial markets. There is no question that if the Federal Reserve started to increase interest rates dramatically, it would start to hurt stocks. But using the Federal Reserve’s own words, that may be years away. It is, however, already dramatically hurting the performance of bonds. As noted above, bonds for the one-year period had a negative rate of return. Bonds are not a good investment right now. However, the effect on stocks is much more positive.

Morgan seeing the waterfall while hiking at Roswell Mill

If you envision a company that has inventory and inflation had increased the prices of that inventory, they have instant gain with an increase in the underlying products that they sell to the public. This instant increase in prices generates future higher profits for the company. In addition, the assets owned by the company are likewise increased in value due to inflation. Therefore, the machinery, equipment and real estate also have a higher valuation prior to the increase in inflation. While these increases in valuation do not necessarily increase the value of the stocks, they dramatically increase the cost for a competitor to come in and compete with the company itself. This increase in fair market value of the underlying assets is very much a positive for corporate earnings. Why some question that runaway inflation would have a dramatic negative effect on the economy, it appears at the current time that this economy is literally “on fire” with the Federal Reserve waiting for future increases for future information to make any change in interest rates.

There was a short-term sell off of the stock market last week when the Federal Reserve announced that they would be selling some of their corporate bonds that they have accumulated during the crisis. However, what they did not specifically mention was that they would not be selling any of their Treasury bonds. In fact, the Federal Reserve currently continues to buy Treasury bonds on a regular and continuous basis. Most people are confused why the 10-year treasury has not moved significantly above the 1.6% rate when reported inflation is well above 2%. There is a specific reason why that rate is continuing to be steady. With the Federal Reserve basically buying up all the excess Treasury bond issued it is unlikely that rate will move dramatically without the Federal Reserve backing off. At the current time, the Federal Reserve announced that it is not their intention to back off on these purchases prior to 2023. Therefore, if your major concern is that inflation would impact the value of your stocks on a current basis, that is misplaced.

Danielle, Reid and Caroline smiling for this sweet shot

One of the items that always perplexed me was why people do not save more. I get the answer as quoted above by Warren Buffett that they just don’t have any money left over after their monthly expenditures to save. What I have seen over my 50 years in the business, young couples come out of college and both begin working simultaneously and make a good income. Over time they just increase their expenses so that their monthly budgeting equals basically their income. When asked why they do not save more they reflect upon all the expenses and indicate there is nothing left to save.

I often question why people tell me they only put in their 401(k) plan exactly what the company matches. Since a 401(k) is, under current tax law, the absolute largest tax deduction a young professional could get, you wonder why they do not participate more. In fact, in most cases, virtually all workers should attempt to maximize their 401(k)’s on a regular basis. If you look at a chart where you start to save early in life and continue to save over time, a financially secure retirement is almost guaranteed. However, if you wait until later in life the difficulty to accumulate these amounts are enormous.

As we all know the stock market on average goes up 9% a year, yet too many people are trying to time the market and ignore that proven fact. If you look back to March 2020 all the people that sold out of the market during that time period were the losers in a financial market that was legendarily high. Take a look today at all of the cash sitting in checking accounts. It is now estimated that over $3 trillion is sitting uninvested in money market accounts today. We all know that money markets are paying virtually zero interest and CD’s are paying almost zero. As noted above, over the last one-year period, the S&P 500 is up 40% and money market accounts are up 0.1 of 1%. You do not have to be a Philadelphia lawyer to understand the value of being invested as compared to being in cash.

The Schultz family in their Sunday Best

Last week the Commerce Department reported that May hiring increased by 559,000 employees. It also announced that the unemployment report dropped from 6.1% to 5.8%. However, with those numbers came out the stark reality that there are still 9.3 million people in the United States that are unemployed and potentially available to work during the month of May. One of the major components of inflation is job-related wage increase. It should be evident to everyone that hiring is almost at a standstill in America because so many workers refuse to go back to work. There is no shortage in employees, there is just a shortage of people wanting to work. Virtually all industries that pay minimum salaries are searching for employees to fill those positions. One of the major reasons quoted is that the extra $300 a week in Federal unemployment insurance is causing employees not to want to work, and to stay home and collect benefits. It has already been announced that 25 states will eliminate this $300 increase, effective immediately. The President also announced that these increases will stop immediately in September of 2021. The economic effect of stopping these increases in Federal unemployment should be obvious. If only half of the people currently unemployed now take jobs, since unemployment is unprofitable, the economy should pick up even further. These are people paying taxes and consuming once again to help the economy grow.

People ask me all the time how I knew and how I was correct regarding the absolute turn around in the economy during the early parts of 2021. Basically, I look at the numbers every day to determine whether the economy is moving ahead or sideways. But if you want to hear information that is more down to earth and easily understood, look at the case of Las Vegas, Nevada. For the month of April their weekend occupancy in their hotels was 83.5%. In January, that weekend occupancy was 48%. During the month of April there were 2.9 million air passengers coming into Las Vegas. In the month of January there was 1.5 million. Most importantly, during the month of April the unemployment in Nevada was 8%. During April of 2020, the unemployment in Nevada was 29.5%. As you can see there is a real-world increase in the economy happening overnight.

I happened to fly to Florida over the Memorial Day weekend and can report that the airports were completely crazy on Memorial Day. There were lines to get into restaurants lined up down half the corridors with passengers. There was a shortage of rental cars in both markets and the airport appeared to be exactly at the same level of capacity that it was prior to the pandemic. I flew quite a bit during the pandemic and can report walking into Tampa International Airport at seven o’clock at night and there not being one single passenger other than me. This most recent trip, the airport was virtually at capacity of people trying to catch flights out of Tampa.

DeNay visiting the incredible Van Gogh exhibit

Another common reason I hear people will not invest in the market is that the market is too expensive. One of the things I that I try to do with potential investors is ask them how they have determined that the market is too expensive. Well basically they read what is quoted in major publications and believe those facts and figures to be accurate. But one of the things misunderstood by the investing public is that if the price of stocks are at a certain level today, but earnings continue to go up, doesn’t that mean that prices will be cheaper in the future? As I have often said in these postings, the most important component in pricing stocks is the level of earnings of these stocks. At the current time, earnings are exploding to the upside and the public does not seem to get the point. It is now being forecast that earnings from the period from May through December of 2021 will increase a dramatic 23% higher from where they were in May. If earnings continue to increase, as I suspect they will, stocks will continue to get cheaper. Why would you not participate in this increase when we absolutely know it is occurring all around us?

One of the major concerns of the investing public has been the pandemic and the spread of COVID. Maybe you haven’t noticed that COVID infections are down close to 90% of what they were six months ago. In the entire Unites States yesterday there were only 11,000 new cases. Deaths from COVID are falling dramatically and now average around 400 a day as compared to several thousand six months ago. If we could encourage the rest of Americans to get vaccinations, heard immunity could be reached this summer. Already 63% of Americans over the age of 16 have now been vaccinated at least one time and the number of vaccinations is going up roughly at one to two million a day. It is very clear that the vaccinations are stymieing the spread of this terrible virus. Correspondingly, as cases go down the public is out again spending all their accumulated resources. Given the fact that they have not been able to spend over the last 14 months, you are seeing an explosion in hotels, rental cars and virtually any type of lodging on the beach.

This upward explosion of the economy has occurred without the new Federal money that is being discussed to spend in Washington. At the current time, Congress is considering an additional $4 trillion of Federal stimulus in the way of infrastructure type changes. This would provide funds for additional roads, highways, bridges, dams, etc. While all those things are clearly needed, dumping all that money into an already overheated economy will only make the shortage of commodities worse over the short term. It is my opinion that Congress will go slow with these increases, and we will not see them implemented until much later in the year 2021.

Jodi Dufresne, 36-year client, enjoying her horse on a spring day

So where do we really stand on the economy and exactly what does the future hold? While no one can truly predict the future, we do have some evidence of exactly where we stand. The Federal Reserve of Atlanta makes a projection of future GDP growth based on their internal models. Currently they are forecasting an increase of GDP for the second quarter at 10.3%. The entire Federal Reserve is forecasting the economy in the U.S. for the entire year of 2021 to increase above 7%. If we were to end the year with a 7% increase in the economy that would be the best yearly increase since the Ronald Reagan years. There is no question that the economy is coming back in a big way. We all see it every day around us and just like I predicted, the increase will be substantial and long-term.

In circling back to the original reason for writing this blog, I am questioning why people will not invest all the cash they are sitting on. After a dramatically higher year in 2020 and a great start to 2021, everyone should consider investing their cash that is earning nothing for long-term results. We now know that the three components of higher stock prices are firmly in place. The three components of higher stock prices are interest rates, the economy and corporate earnings. The chairman of the Federal Reserve, Jerome Powell, has confirmed that he has no intention of restricting the economy or increasing interest rates prior to 2023, which is a cool 18 months from today. We know based upon the information presented above that the economy is totally on fire. Businesses today are dealing with the exact opposite that they dealt with over a year ago. Corporate America is trying to hire employees, but they cannot do so. Everywhere you look, employers are seeking employees but cannot fill those positions.

Josef Martinez, Morgan and Kari catching a Braves game

These trends are a clear indication of the strength of American corporations since they are now hiring rather than laying off employees. Also, we know that corporate earnings are dramatically increasing and even the pros are forecasting an increase in earnings in 2021 of greater than 20%. There are many forecasters that think in the last half of 2021, corporate earnings will be even higher. It is a fairly conservative forecast that the earnings will be higher given all of the new employees that have gone on the payroll in the early 2021. In addition to the prior Federal stimulus, if the government continues to give out free money to Americans and businesses, we expect the economy to grow even faster and bigger.

So, my forecast for the future looks like an economy that will continue to grow, earnings that will continue to increase and interest rates that will be stable. That is the trifecta of positive economic data that will lead to higher stock prices. There is absolutely no question that the concern of the Federal deficits will increase inflation. However, my assumption is based on history that the increase in inflation is years away rather than months away. We also know that eventually the Federal Reserve will have to increase interest rates to slow down an overstimulated economy. Once again maybe years from now, but not months from now. As we go forward to the summer and more and more Americans become vaccinated and corporate travel and recreational travel doubles, you will see corporate profits unprecedented in modern times. All these positive economic effects will have a negative effect on bonds, but a positive effect on stocks.

There has been a dramatic change in the investing of growth stocks in the last part of 2020 and the first five months of 2021 as there has been a transfer to value stocks due to the turnaround in the economy from recession to expansion. However, do not give up on the growth segments of investing. The growth companies such as the large tech companies are recording profits unprecedented in American commerce. All of the positive economic events represented above will only increase those profits, not decrease them. While values stocks are certainly rallying in the first part of 2021, I see a shift back to growth this summer and an expansion of growth for the rest of the year.

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately. However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments.

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins

Why Would Anyone Invest with any Advisor That is Not a Fiduciary?

I have wanted to write extensively on the title of this posting because I consider it to be of the utmost importance. Everyday I think to myself that there are so many investors losing out on one of the greatest bull markets of all time. With the stock market up over 20% in 2017, and up almost 10% so far in 2018, so many investors have wasted a once in a lifetime return with financial advisors that do not have their best interest at heart. I will continue this discussion in greater detail later in this posting.

Lucy & Harper Wilcox

Lucy (6) and Harper (8)

Eddie Wilcox and wife, Jennifer

Before I discuss that topic, I have to discuss the extraordinarily good month of August 2018 from an investment standpoint and once again emphasize the strength of the U.S. economy and why markets are likely to continue to advance even after they hit all time highs in August. The economy at the current time could not arguably be better. GDP was adjusted higher for the second quarter and unemployment actually ticked down. Corporate earnings are now exceeding the 20% year over year estimates and the consumer has the highest optimism levels in over a decade. What is even more important is interest rates continue to be unbelievably low, despite being higher this year, and inflation is moderate. All things considered it is the perfect Goldilocks economy.  Not too hot, not too cold - just right. 

For the month of August, all the major market industries posted all time highs. The Standard and Poor’s index of 500 stocks was up 3.3% during August and up 9.9% for the year to date in 2018. The one-year period it reported an excellent 19.7% increase. The Dow Jones industrials average was up a more moderate 2.6% during August and it is up 6.7% for the year 2018. For the one-year period it is up 21%. The real winner during the month of August was the NASDAQ composite, it was up 5.8% in August and is up 18.3% for the year 2018. For the one-year period the NASDAQ composite is up a sterling 27.4%. For those of you that continued along investing in bonds, the Barclays Aggregate Bond Index was up 5% during the month of August but has a negative return for 2018 at -1.2%. For the one year period that index has generated a loss of 1.3%. As you can see any investor that has a significant allocation to bonds is not even coming close to generating a return as high as the underlying rate of inflation.  

Due to the new highs being reached in the markets, a great deal has been said in the press lately regarding the potential for a huge decline in the stock market. I am not sure where the naysayers are finding their research on this subject since it is not supported by economic facts. Yes, it is true that the major market industries have hit all-time highs, but the market, by any measurable standard, is not overpriced. Due to the huge increase in earnings that U.S. corporations have realized over the last several years, the P/E ratio is still maintaining historically moderate levels.

If you look at the current earnings for the next 12 months, the P/E ratio for the Standard and Poor’s Index of 500 stocks is only at 17. If you evaluate the last 4 decades of investing you will find that, on average, 17 is the standard valuation represented by this index. So, when your neighbors or friends tell you the market is overvalued, ask them exactly what standards they are using to make this determination.  In every decade since the 1920’s the average P/E ratio for the S&P Index has been 17, precisely where we are today!

About 90 days ago, there was much discussion in the press that the inverted bond yield would in fact push the economy into recession sooner rather than later. However, not many people have mentioned lately that the 10-year Treasury has actually declined, hovering around the 2.8% range over the last 90 days. There is actually an economic reason for this lack of movement, although the Federal Reserve continues to push short term rates higher. What we are seeing is a moderating inflation cycle that has not exceeded the 2% threshold as mandated by the Federal Reserve. But more importantly, there is a huge drag on interest rates by the 10-year Treasury rates in competing countries. If the Federal Reserve pushed up rates too high, money would flow out of foreign currencies into the U.S. dollar, hurting their economies and making their currencies less competitive. Trust me; I don’t think the Federal Reserve has any intention of creating that chaos and is likely to only make one more increase in 2018. 

It is amazing to me that I have to explain to people how well the economy is doing. You do not have to look far to see all of the construction cranes in Atlanta; and good luck trying to get reservations at your favorite restaurant. Have you noticed that traffic is terrible everywhere you go, at all times of the day? I drive by the full parking lots of Lenox Square and wonder to myself why anyone would be inside a mall on a beautiful Saturday afternoon.  

The department of labor has just announced that the unemployment rate continues to be below 4%. The economy added 201,000 jobs during the month of August, which by all historic standards is a very slow month for employment. As I have pointed out in these pages for many years, the more people you have working in America, the better the economy will be. With more jobs you will see the economy pick up in every respect and right now we are above full employment in America. If you want to know how strong the economy is you have to realize that U.S. employers have added to payrolls for 95 straight months.  This is the longest extended job expansion in the history of the United States. Also, it was reported that manufacturing activity in August expanded at the strongest pace in more than 14 years and U.S. corporate profits boomed in the second quarter. I am not sure exactly what type of evidence that you would need to accept the reality of the strength of the economy, but those statistics are pretty compelling. 

There is no question that there is economic uncertainty in the emerging markets and of course in the world’s smaller economies. Much of this uncertainty and the decline in value is a direct result of the issue with tariffs. However, from a true economic standpoint, the cheapest markets in the world today are Asia and the other emerging markets. They are however, not investable at the current time since the momentum traders continue to create economic chaos by forcing these stock markets down. The traders have neither the capital nor willpower to stay in these trades forever. Even though the emerging markets have incurred 5-6% losses over the last 90 days and are today trading down -7% while the S&P is up 10 %, it will be a quick rebound. Obviously, no one knows exactly what date this rebound will occur, and we are better off not investing in those markets until it does.  I’ll bet that you will see the emerging markets rally late in 2018.

The month of August was an excellent month financially, but the more new clients I began to see coming in, the more I questioned why anyone would entrust their hard-earned money to an advisor with no fiduciary responsibility. I see so many cases of new clients who have been taken advantage of by previous advisors, and yet people out there continue to invest with non-fiduciary advisors. Many of these large brokerage houses and banks do not have your best interest at heart; they invest your money in investments that benefit them more than you. It just baffles me that anyone would take that risk, and I intend to cover that matter later in this posting. 

Ava at the beach, age 7

Carly Kramschuster at the Braves game

Let me give you a couple examples of what I have seen over the last few years with new potential clients. I had a lady come in recently who was 72 years old. She had absolutely no knowledge of the financial markets and no real understanding of what was going on with her money. However, at 72 years old she was fully retired and expected to live off of her retirement money. She, like many others, was scared to death of investing in the stock market and was therefore drawn in by an advertisement from an insurance company that guaranteed her 6% for the remainder of her lifetime.  

She had no idea exactly how this annuity worked and gave me the actual document to read, which ran close to 100 pages. This lady was 72 years old, but the annuity provided that for the very first 10 years of the annuity she was not allowed to touch it. Therefore, her money was tied up from age 72 to age 82, during a time where she desperately needed the cash flow for her monthly needs. This is an example of how insurance agents take advantage of retired people. When you think about it, after the money has sat for 10 years, the commitment to pay 6% over time is hardly a stretch for even the worst investors. The lady decided to cancel the annuity so she could have ready access to the money and transferred it to another form of investing, incurring a penalty of roughly $60,000.  

We had an unfortunate situation where a husband died tragically early, but fortunately for his wife and family he had roughly $1.5 million in life insurance. Six months after making this transaction, with annuities from the insurance company, the widow realized she had no opportunity to spend the funds that were to be her livelihood after his death. After a while, she determined that the annuity was impossible to live on based on her cash flow and agreed to take a $150,000 penalty for canceling the policy. Another example of why these types of deals should be illegal... Did the agent really have the widow’s best interests at heart?

We had two clients in recent weeks that had very large government pension plans. If you think about it, a government pension is much like a fixed income portfolio since it pays out for life at a reasonable rate of return with no volatility. It also goes up annually with inflation so it is a wonderful hedge against future expenses. In addition to their wonderful government pension, they had $500,000 or so in fixed rate investments. If you put that on paper, you would quickly see that virtually 100% of their money was in fixed income, with their investments earning next to nothing over the past few years. This is a classic case of an investment advisor who did not understand a client’s entire finances and recommended investments that benefitted him more than the client. Once again, a prime example of why there should be a regulation to keep advisors from taking fees from products they sell to clients.  

Recently, I had a very distinguished couple come into my office who lived entirely off of their investments and social security. They had roughly $500,000 invested with their local bank manager. I asked if I could see their investments and found that every dollar was invested in tax-free municipal bonds. Of course, over the last few years as the interest rates have been rising, they have made no money whatsoever on their tax-free bonds. This led me to wonder whether they had a substantial tax problem and thus the need for the bonds. When I looked at their tax return they had zero taxable income and had not paid any income taxes over the last decade. This type of poor advising of the clients is the reason we put so much emphasis on taxation in our investment plans.  

Shortly after I started my business in 1980, I would get up every morning, get fully dressed, and sit down at my desk. I only had a few clients and not much to do, so the highlight of my day was when the Wall Street Journal arrived in the mail. By that time it was 2 days old, but it was still news to me. There was no internet and obviously no financial news programs on television. You had to get your financial news the old fashioned way: the newspaper. I would study the Wall Street Journal from cover to cover, reading virtually every article regarding investing and tax matters. It would literally take up the majority of my day, right up until 4 o’clock when M*A*S*H would come on the TV. So, my day would be occupied by reading the financial news and enjoying the Korean War again for basically 10 hours a day. Needless to say, I have seen every M*A*S*H episode that was ever made.

One day, I received a phone call from my “friend” at Merrill Lynch. He indicated they had a unique opportunity that he thought I should invest in. Basically, it was an orange juice manufacturer near Tampa with its own groves that processed orange juice for wholesale. Since my “friend” had recommended it, I elected to buy 1,000 shares at $6.50 per share, which was a world of money to me at that time. Since I was new to investing, I had no knowledge of the conflicts of interest that major brokers legally practiced. With great anticipation, I was sent the confirmation of my purchase and watched it daily in the coming weeks and months.  

After about two months, the stock began to fall. I called my broker to find out if there was some negative news I should be aware of, and he indicated no, everything was fine. On the 90-day anniversary, my outstanding stock was now down to $3 per share, losing more than 50% of its value. At that time, I decided it was time for me to find out exactly what was going on. It was not like I had anything else to do, so I booked a flight to Tampa to attend their annual meeting and see exactly what the company was all about. Clearly, I should have done this prior to investing, but again, I was a novice and learning as I went along. 

At the annual meeting, the president of the company strolled in; I vividly remember that he was wearing a yellow seersucker suit and was smoking a cigar. To this day, he is still the most obnoxious host I have ever been around in a public setting. He refused to answer questions from the audience, dodging any inquiries into the company’s financial standing. After the meeting, I did an analysis of the financial statements. I found that while the orange groves were on the balance sheet of this public company, they were actually purchased by him personally and he was draining off most of the company’s profits through rent of the actual groves themselves. This was a clear conflict of interest with the business and even I, the proud owner of a mere 1,000 shares, could see it.  

I mention this story, not to explain how I lost money since I eventually sold the stock for about $1 per share, but rather to point out the conflicts of interest that play a major part in non-fiduciary brokers’ and bankers’ income stream. I found out later that Merrill Lynch was the underwriter of this particular security, meaning they billed large sums for providing this service. At that point, they turned over the security to their retail brokers and instructed them to call on their best clients and sell out the inventory of the underwriting. By virtue of ten thousand brokers calling their clients across the United States, there was an immediate demand as Merrill Lynch sold off the shares from their inventory. As you would expect, after the entire inventory was sold there was little demand for the stock. The volume collapsed since Merrill Lynch was no longer selling or buying the stock and it ultimately failed, dropping to an almost worthless value. 

If you have ever wondered why your broker calls and asks for your permission to buy or sell a particular security, there is a specific reason. Unless they are operating as a fiduciary, as we are, they need your permission to do so. And because they receive commissions on these trades, they clearly need your consent. In addition, they have the authority to lend your shares to short sellers and basically treat your shares as their own while it is held in their accounts. This brings me back full circle as to why you would ever make an investment with any broker or advisor that did not have a fiduciary responsibility to you. My “friend” at Merrill Lynch was never my friend again.

You would think that this concept is so basic in nature that I would not even have to ask that question. It really all comes down to “Do you trust your advisor,” and “Who is truly benefitting from your invested dollars?” If you buy an annuity or life insurance policy with a huge upfront commission, you need to understand that the product you purchased paid a large fee to the person who sold it to you. You should never have to question whether a recommendation from your advisor is better for you or for them. If you are dealing with an advisor that is a fiduciary, you will never have to worry about this matter since no commissions are ever paid to them on investments made.  

One of the basic concepts of our practice when I set it up in the late 1980s was that I wanted everyone to know that we would never take a fee of any kind from anyone but our clients. We have no financial relationships with the custodians, the mutual funds, etc. The only payment our firm receives is from our clients - never a third party. A concept as simple as this should be established by any major advisor. Unfortunately, people on a daily basis entrust their hard-earned retirement money with advisors that benefit directly from the investments themselves and not from their clients.  The lesson to be learned here is, never invest your money with any advisor that is not a fiduciary. 

We encourage you to come in and visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email. 

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

Best Regards,
Joe Rollins

Timing IRA Contributions

This week’s blog is similar to one we ran as part of our Q&A series a few years ago. We often have clients who question our reasoning for making IRA contributions as early as possible, so I would just like to reiterate our stance.

In the past, many of you have received some form of communication from Rollins Financial suggesting you should make an IRA contribution early in the year. Many undoubtedly wonder, “What’s the rush?” Although you actually have until the tax filing deadline of the following year to make your IRA contribution, we find it to be in your best financial interest to make the contribution on the first business day of the year (which for 2014 is January 2nd).  

As many of you know, stocks do not rise in value in a straight line. However, during 2012 and 2013 there was not a single day during either year that the S&P was negative in YTD performance. This means the best time to have invested was, in fact, day one! Granted this is an unusual situation, and if we actually knew ahead of time the best day out of the 15½ month window to make your IRA contribution, we would obviously suggest you make it on the day when investments are the cheapest. Unfortunately, no one can predict when that day will be. And if they could, they surely would not be reading this blog (or writing it for that matter).  

That being said, let’s focus on the likeliest scenario. Stocks have produced positive annual returns in approximately 72% of the calendar year time periods since 1926. The probabilities suggest that there is value in contributing as early as possible. And here’s why….  

As an example, let’s make the following assumptions:  

• Our Expected Return is 8% annually (some years will be higher and some lower, but we’ll expect this average over the next 35 years)

• Each Participant will make an annual lump sum contribution of $5,500 to their respective IRA

• Each person will retire at 65 (we’ll use this as the year end age)

• This is their only means of savings

If we make the noted assumptions, you can see the results in the following table: 

After reviewing the table, you’ll notice the savers, who choose to invest their IRA contributions at the beginning of the year and are exposed to the 8% return for the entire year, will realize higher returns. The 30 year old who contributes and invests for 35 years realizes total returns of over $75,000 more by making his/her contributions early in order to gain the full benefit of each year’s returns. The 40 year old is better off by nearly $32,000, and finally the 50 year old who has only invested for 15 years has nearly $12,000 more than if he/she had waited and contributed at the end of the year.

I also performed the same test for those of you who can contribute to a SEP-IRA. Since SEP-IRA contribution limits are much higher, the potential benefits are also greater when making early contributions. Let’s start with the assumption that a 40 year old with 25 years until retirement can contribute $30,000/year annually to a SEP-IRA. This hypothetical investor could end up with an IRA balance at retirement containing an additional $175,000 in value by making his/her SEP contributions at the beginning of the year vs. waiting until the tax filing deadline to make the contribution.  

What’s the moral of the story here? Be proactive! Make the most of your annual IRA contributions; don’t wait until the end of the year or until the filing deadline in April to make your contribution.  

Thank you again for visiting RollinsFinancial.com and we hope you have found this information useful. Please feel free to email us and provide us with your thoughts and comments.

Best regards,
Eddie Wilcox, CFA, CFP®

No One Warned Me That Old Yeller Was Going To Die!

With the excitement surrounding the recently released movie version of “Marley & Me,” I couldn’t help but be reminded of going to see “Old Yeller” when I was a young child. I’ve been a Labrador retriever owner virtually my entire adult life, which I’m sure is from seeing Old Yeller’s loyalty to the Coates family in the beloved film. There are only a few films from my childhood that actually left an impression on me, but “Old Yeller”is certainly at the top of the list.

Growing up in rural Tennessee, our family had one small, black and white television set with rabbit ears and terrible reception. We watched the “The Wonderful World of Walt Disney” religiously, and one of my heroes at age 8 was Fess Parker who played the title character in the “Davy Crockett”Disney television series. You can imagine my excitement when I heard that Fess Parker would be starring in the Disney-produced “Old Yeller.”

In the 1950’s, going to the movie theater was an all-day experience. No one really worried about when a movie was scheduled to start or end; we simply went to the movie theater and stayed almost the entire day, watching not only the marquee movie (sometimes over and over again) but also the various film shorts and previews.

I hadn’t read Fred Gipson’s novel, “Old Yeller,” prior to going to see the movie, so I had no idea what the story was about. The main draw to the film for me was that Fess Parker was in it. Because it was produced by Walt Disney, I had my father’s stamp of approval to go see it. I can remember my father dropping me and my brother off at the movie theater one Saturday for a day of “movie madness,” and I also remember him giving each of us $1 to last us the entire day. The ticket to get in was a whopping $0.25, and the remaining $0.75 had to be carefully budgeted to buy our junk food and sodas throughout the afternoon.

“Old Yeller” centers on the Coates family, rural Texans who are very poor. One day when the father, played by Fess Parker, is away on a cattle drive, they receive an uninvited visitor, a scruffy “yeller” Lab mix. Yeller proves his loyalty to the family time and time again by saving them from frightening situations. One of the boys, Travis, grows especially close to Yeller, despite having been somewhat skeptical of him when he first showed up at the house.

Near the end of the film, Yeller develops rabies while protecting the family from a rabid wolf. Travis realizes he must protect his brother and mother from Yeller, who has started showing signs of madness from the rabies. In a heartbreaking scene, Travis tearfully shoots and kills Yeller.  Did you cry, too, when you first saw “Old Yeller”?  

In an effort to cheer-up Travis, who is devastated from the death of his beloved dog, he is given a puppy sired by Old Yeller. Travis initially refuses, but after his father explains the circle of life, he accepts the puppy, naming him “Young Yeller.”

Watching “Old Yeller” again recently, I noticed that the film would be considered amateurish by today’s standards. However, the story is just as moving now as it was back in 1957, and the climactic scene where Travis kills Old Yeller and makes his first step towards manhood is just as emotional and timeless. I may not have known Old Yeller was going to die when I first saw the film 52 years ago, but its rawness was still a jolt to my emotions when I watched it again the other day.

As an aside, I didn’t remember Chuck Connors being in “Old Yeller,” and I was surprised to discover that he had a role in the movie. After “Old Yeller,” Connors starred in “The Rifleman,” quickly becoming another one of my heroes. Connors had been both a professional basketball and a baseball player, and he is one of the few athletes who was able to play two professional sports successfully.

In the ABC series, “The Rifleman,” Connors played “Lucas McCain.” I vividly remember asking for a toy rifle (a politically incorrect toy for a child nowadays) just like Lucas McCain’s for Christmas one year. Similarly, several years after Disney had made Fess Parker a star in “Davy Crocket” and “Old Yeller,” he was cast in Fox television’s “Daniel Boone.” Oddly, the Davy Crocket and Daniel Boone characters both wore coonskin hats and carried big knives, making me forever mix-up the television shows… 

Like “Old Yeller,” “Marley & Me” tugged at my dog-owner heartstrings. Before watching the film last night, I had actually read John Grogan’s memoir of the same name. In it, Grogan details the 13 years he and his family had with the boisterous and sometimes destructive yellow Lab named Marley and the invaluable lessons they learned from him.

After all my years of owning and breeding Labs (Daisy’s two litters totaled 20 pups!), I can relate to Marley’s various shenanigans and how his sometimes wild behavior and undying devotion impacted the family. I can also relate to the grief felt by the family after Marley’s death from old age. Truly, the only downside to owning a dog – even a nutty dog – is that they have such a short lifespan.

The movie version of “Marley & Me” is very good, although there are some differences between the film and the book. Grogan’s memoir details Marley’s neuroses quite explicitly, many of which would have been difficult to translate to film. However, the movie is still excellent, and even though I knew the ending, it didn’t make it any less sad to watch.

Just like no one warned me that Old Yeller was going to die in 1958, no one warned me that 2008 – 50 years later – would be such a devastating year for the financial markets. But the financial news was not nearly as bad as what the media was reporting, and I continue to be in the camp that believes much of the Wall Street carnage increased due to all the negative news being reported by the media.  But whatever the reasons, 2008 was undeniably a tumultuous and wealth-endangering year.

As the 2008 year came to a close, the Dow Industrial Average finished down 31.2% for the year. The Standard & Poor’s Index of 500 Stocks was down 37%, and the NASDAQ was down 40%. OUCH! There’s no way to sugarcoat the terrible performance for the year; it was, in a word, devastating.

The 2008 investment year can essentially be summarized very simply. In 2008, there were only two classes of assets that made any money: cash and Treasury bonds.  Everything else lost money, and in many cases, in a big way!  

As I have previously explained, in every other year of investing, asset managers would typically move to a higher position in fixed-income assets to accomplish less volatility in a portfolio. But in 2008, that strategy did not help. Bonds, like stocks, suffered losses in the double-digits. In many cases well-respected long-term bond funds lost close to 30% for the year, and therefore, only cash and Treasury bonds seemed to offer any buffer to the sell-down that occurred (principally in the 4th quarter of 2008).

I truly believe that things are getting better now for the financial markets. I’m not implying that the economy is getting better, but as I’ve pointed out before, it’s not necessary to wait for the economy to recover for stock market performance to improve.  In fact, there is even a general air of optimism being reported in the news! I don’t know whether this has to do with the incoming Obama administration, but quite frankly, given the avalanche of negative news that all of us have endured, any form of positive message would be a welcome improvement.

Something that clearly illustrates the investing public’s perception that the financial markets are improving is the current situation concerning U.S. Treasury bonds. As I pointed out in my December 13, 2008 post, “What We’ve Got Here Is a Failure to Communicate,” investors that ran to the safety of Treasury bonds did so at the risk of a significant amount of capital loss over a short period of time.  

As 2008 came to a close, the 10-year Treasury bond was threatening to break below 2% annualized. Investors that were late in buying those bonds have now suffered through a dramatic decline in principal in the fourtrading days that have occurred so far in 2009. Four trading days since the beginning of the New Year, the 10-year Treasury is now yielding close to 2.5%. These investors have incurred a massive loss of over 4.5% in principal in a little less than one week.  So much for the safety of investing in Treasury bonds!! 

A featured article in Investor’s Business Daily this week pointed out that money market accounts that invest in U.S. Treasury bonds are now on the verge of offering negative returns. Since these money market accounts require some expense to manage the funds, there is not enough of an investment yield to pay those expenses. For the first time ever, these money market accounts are now facing the difficult task of either closing entirely or offering potentially negative yields to the public.  It seems that the public is finally recognizing that other forms of risk capital, like equity and bonds, now offer an alternative to the zero interest rates Treasury bonds are offering.

Another obvious sign of an impending recovery is the incredible publicity regarding the efforts by Congress to revive the economy. The ante keeps being upped almost every day. It’s important to recognize that the original $700 billion in TARP money has not even been completely expended. The $350 billion doled out to the banks has barely been in the system, and the remaining $350 billion of the TARP money has yet to be allocated. I think we will live to regret trying to push the remaining money into the economy if we don’t wait to see whether the $350 million that has been expended has been effective. 

I fully realize that I previously stated that it’s better to over-stimulate the economy rather than take the risk for it to not be stimulated enough. However, the question really becomes, “How much is enough?” With these two stimulus bills alone, we are talking about nearly $2 trillion in additional stimulus money. Additionally, the Federal Reserve has launched their program to buy mortgages, pushing down long-term home mortgage rates significantly below 5%. It would have been more desirable to wait and institute these programs gradually to determine the progress before funding the next program. I guess we will never know now since it is clear that a bipartisan Congress will approve a gigantic stimulus package sometime before February 15, 2009.  

Democrats in Congress originally touted an economic stimulus plan of approximately $100 to $300 billion. Over the last week, this money has grown exponentially to $700 billion to $1 trillion. Unlike the TARP funds, this money will not be invested in assets that will be returned back to the Treasury. Rather, these assets will be invested in tax cuts and infrastructure for building bridges and roads. In other words, once this money is spent it will be gone forever, which is concerning. There’s no question that the economy has stabilized over the last month. But my fear is that this incredible flood of money from Congress’s economic stimulus package will destabilize the economy in the coming years.  I fear that the economy will already be improved before this money is ever spent.  

On another matter, the press – which is quickly becoming my #1 nemesis – is at it again. The Atlanta Journal-Constitution recently stated that the U.S. deficit would exceed $1.2 trillion in 2009. While the deficit unquestionably has the potential of getting that large, the AJC didn’t bother providing the specific details. In fact, after reviewing the specific bill, it’s fairly clear that some of these expenditures will only happen one time and will not be ongoing expenditures.  

It’s currently estimated that the TARP will generate a loss of only $184 billion in the 2009 budget as compared to the $700 billion deficit being proclaimed by the press. During this budget year, the Federal government will invest $218 billion in Fannie Mae and Freddie Mac. This is a one-time investment that, in fact, should generate net positive returns to the Treasury in the future. In addition, the Federal government has invested $24 billion in the FDIC to stabilize that fund for potential bank failures and will not be recurring in future years.  

Accordingly, in the Federal 2009 budget, $426 billion is expected to be expended on one-time only items. Unfortunately, the media doesn’t seem to take those facts into consideration when publicizing the potential deficit.  For the press to say that this potential deficit is a higher percentage of GDP than the deficit for 1980 – which is something I have been reading lately – is completely false.

The economy doesn’t need to fully recover in order for stock prices to start climbing upward. What we really need is for the economy to stop going down, not turn up. If all of us suddenly realized that the economy had bottomed, the stock market would begin to turn-around practically overnight.  

Not many people realize that the financial markets actually traded positively for the month of December in 2008. I wouldn’t be surprised if you hadn’t heard this positive news. With the avalanche of bad news being provided by the media, it is really hard to uncover even the smallest amount of positive news. However, the Dow Industrial was up 0.6% for December, the NASDAQ was up 1.1% and the S&P 500 was up 2.8%. These returns for December were quite excellent, and it was a good way to end an otherwise disastrous year.

One reason why I feel that movement is starting to happen is because of the improvement we have seen in stock prices since the market bottomed on November 20, 2008. Since that day through today, the Dow Industrial Average is up 15%, the S&P 500 is up 21%, and the NASDAQ is up 23% (notincluding dividends). The stock market is clearly improving, although it’s hard to see that with all the negative news we’re being provided.

I want to reiterate that the volatility we suffered in 2008 was completely unusual. I recognize that investors felt devastation every time they reviewed their dwindling portfolios, and I can tell you first-hand that money managers were feeling the destruction every minute, 24-7. It is incredibly difficult to explain all the wild moves and volatility when the economy doesn’t even support those drastic moves.  In any event, I think it’s safe to say that we’ll never in our lifetimes see the type of volatility that occurred in the 4th quarter of 2008.

In the history of stock market investing, there have only been 37 days where the S&P moved over 5% in a single day. Of those 37 days, 18 of them occurred in 2008. For perspective, there were two days of 5%-plus moves in 1950, one in the 1960’s, one in the 1970’s, seven days in the 1980’s, fourdays in the 1990’s, and four days from the period from 2001 through 2007. In 2008, when the S&P moved 5% or more on 18 days, seven of those days were positive and 11 were negative.  

In essence, we had more 5% moves in the S&P 500 during 2008 than we have had in the entire history of investing prior to 2008. In terms of volatility alone, the 4th quarter of 2008 was like suffering through 57 years worth of volatility.  I don’t believe that we’ll ever have to suffer through this level of volatility again – it was clearly a year for the ages!

It’s also interesting to see the analyst projections for the stock market for 2009. The general consensus of market analysts is that the overall improvement will be 10% for 2009. However, I regularly see potential gains in the stock market in the 30% range. I suppose no one really knows what is getting ready to happen insofar as stock market performance. However, with the incredible flood of money that the United States and the rest of the world are forcing the economy to accept, business will improve this year! The stock market will foresee that improvement in business and will react accordingly.  

In closing, I’ve said before that it’s never a bad time to make your IRA contributions. However, right now couldn’t be a better time – the opportunity to make money for your retirement is staggering. Since the New Year has begun, you can now make your contribution for 2009 while the market is still low.  

Additionally, if you haven’t already made your contribution for 2008, you can make your contribution for that year at the same time. If you are less than 50-years old, the maximum amount you can contribute per year is $5,000 (a total of $10,000 if you’re contributing for both years). For those of you who are 50-years old or older, the maximum contribution amount per year is $6,000 (a total of $12,000 if you’re contributing for both years).

The benefits to contributing to your IRA are tremendous, especially when the markets are at such low levels and they are expected to significantly increase. Please feel free to call our office at 404-892-7967 if you have questions about contributing to your IRA.

As I’ve explained above, I expect significantly better stock market performance in 2009 than we have enjoyed over the last four to five years, and I think it’s already starting to happen.

Best regards,
Joe Rollins