The Economy Continues To Improve, Not Withstanding The Media's Attempt To Talk It Down

The month of July 2020 will clearly be one to look back on in financial history as an important month. After an avalanche of negative publicity regarding the economy and the prospects for the U.S. to pull out of the pandemic, the economy continued to strengthen and the stock market reflected that strength. It has been absolutely amazing that for all of the negative headlines we have read regarding the economy and the spread of the virus, that the stock market has dramatically improved over four straight months. July was an extremely strong month for all financial assets.  

I have a lot I want to discuss in this posting and some of it is quite valuable information. I want to explain why the stock market is not likely to have a major downturn due to negative real rates of return. I also want to rebut the so-called “pundits” that argue that the rise in the stock market is a bias against the working class and mainstream. Obviously, they do not understand, as do I, the Wealth Effect which I will explain later in this posting. 

Partner Eddie Wilcox and his wife, Jennifer, walking the beach

Most of the general public has completely missed the implication of Zero-Sum economics. They just do not understand that if one segment of the economy suffers, by the effect of Zero-Sum, some other segment of the market must be strong. That has proven so clearly true in these very difficult times. The most important real-world example I can give you is from the famous comedian, George Carlin, as he described why this country became so fixated on germs. Even though this famous comical dialogue was recorded 20 years ago, it is so very true in today’s economy. I will give you his thoughts.

Before I launch into those fairly interesting subjects, I need to cover the markets for July which were excellent. The Standard & Poor’s Index of 500 Stocks was up a sterling 5.6%, during the month of July. Year-to-date this index broke into the positive 2.4% and for the one-year then ended in July, it is up 12%. In the first couple trading days of August, this index is now less than 1% below its all-time high level. The NASDAQ Composite continues to be the forerunner in all the indexes, up 6.9% during July and year-to-date is up 20.4%. The one-year return on this index is an almost unbelievable 32.8%. This index has outperformed mainly because it is where so many of the young tech companies reside. If you think this is just a flash in the pan, the ten-year return on this index is an excellent 18.2% annually.  

The Dow Jones Industrial Average was up 2.5% during July but continues to be down 6.1% for the year. The one-year return on these 30 largest stocks is, however, positive at 0.8%. Just for purposes of comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.4% for the month of July, up 8% for the year 2020 and for the one-year period up 10.2% for the period ending July 2020. While this was an excellent year so far for the bond index, a couple things are truly interesting. 

Ava and her mask social distancing

Most times the stock market and the bond market move in opposite directions. If stocks are up, bonds are down and if bonds are up, then stocks are down. However, this year those stocks and bonds have rallied significantly so far. That is not normally the case, in that the ten-year annual returns for all the stock market indexes are double digits. The ten-year return on the bond index is a meager 3.8%. I will explain later in this posting why one of the major reasons the stock market continues to go up in an otherwise negative economy has much to do with the real-world effect of negative normalized rates of returns.  

Almost every day I am confronted by an investor asking with great anger and disbelief, “How can we continue to be invested in stocks when the valuation is absolutely crazy at the current time? As of the end of July, the 12-month trailing P/E for the S&P is 26.8 versus 18 at the end of March.” They give me this example with the conviction that this level of P/E earnings is unsustainable and is at a historic height. I am always confused why investors always look at the past and never the future, which is much more important.  

There is absolutely no questions that based on the disappointing earnings for 2020, that stocks are historically high. However, history will always rate 2020 as an outlier. What good information do we have in valuing stocks at a 26 multiple when we know that earnings are depressed - but earnings are likely to improve. It is now the current projection of the S&P, that earnings over the next 12 months should improve by over 48%. If earnings are to improve, as suggested, at 48% should you evaluate the market based on the trailing price earnings or evaluate it on its prospects? Clearly, anyone who has been investing for any period of time knows that whatever has happened in the past is in the rearview mirror, but what we should all be considering is not the past, but the future. Based on future earnings, the market is more closely valued at its March levels than its July levels. Some segments will see greater than 48% – think airlines and hotels. 

The Schultz family at Sea Island

The evidence that the economy is improving is virtually everywhere, but you just have a hard time evaluating it because the media is so negative on the economy. In reading the news over the last couple of weeks I picked out items that were clearly positive for the economy, yet seemed to be ignored by the public. The State of Georgia recently announced that their collections of income tax and sales tax for the month of July was 17% higher than the month of July 2019. Take into perspective that analysis. All of us will acknowledge that in July 2019 the economy was very strong and the population was almost fully employed. However, during the month of July 2020 unemployment was high and the economy sputtering. But the reason should be fairly clear.  

Retail sales have taken a major move up since the lockdown. Part of this, of course, is pent-up demand, but yet retail sales have come back a lot quicker than anyone expected. I will explain this phenomenon later on based on Zero-Sum economics. Also, even though there were huge amounts of the population not working in July, that doesn’t mean that they weren’t being paid. Due to the massive Federal Reserve influx of money, most of these unemployed were making similar amounts of compensation unemployed as they were making employed. People forget that unemployment benefits are taxable and withholding is required. Once again, even though the media would like you to believe the economy is completely in a state of disaster, the facts belie such headlines.  

There seems to be a general lack of knowledge of Zero-Sum Economics. I have clients come in all the time and complain to me that it is impossible for the market to go up because all we have to do is look at the restaurants, airlines, cruise industry and retail to know that the economy is in shambles. Yes, no question, those statements are true, but where did the dollars that would have been spent on those industries actually end up?

Harper Wilcox, age 10, getting some fresh air at the beach

In a Zero-Sum Economy, if money is not spent on one item, but gets spent on another item, then the economy is at zero. If a family does not spend money on going out to restaurants, going on cruises, flying in airplanes or taking vacations, that is clearly a loss to those industries. If, however, that money is spent somewhere else, the economy does not suffer or, just as good, a family saved more. That is exactly what we are seeing today. Do you believe that there are not shortages in certain aspects of the economy? There clearly are, you see them every day, but you just do not realize it.  

Why do you think the grocery stores cannot keep up with toilet paper and paper towels? Those industries are clearly booming as others fail. New car sales have been at historic highs recently. Does that not mean that the manufacturing industry of cars is working overtime to meet the demand? It is my understanding now that golf courses are overwhelmed with people wanting to play and golf equipment and golf clothes reached all-time highs during the month of July. Once again, those dollars are being shifted from one segment of the market to another. One client reported to me that they had ordered a brand-new golf cart for their vacation home but there is such a backlog of orders that delivery has been postponed. Everywhere in the economy you see a negative, you need to look at the other industries in the economy that show strength. While certainly restaurant sales are down, pizza deliveries are skyrocketing. It is everywhere, but due to the negative influence of the media you just cannot see it. What is so clear to me has been largely ignored by the media, is there a reason the media emphasizes the negative and not the positives?  

As mentioned in previous postings, the Federal Reserve and Federal Government have dumped over $3 trillion of money into the economy. If anyone understands the velocity of money, then you understand what $3 trillion dumped into the economy over 90 days does. The acceleration of spending must occur or there would be a huge savings component. In real dollar terms, that means if you received this money you had two options. If you elected to spend it, the velocity of money being at 7, would generate $21 trillion of economic growth. However, in times of great uncertainty with the unknown future of your job and family security, the other possibly was that you just saved the money for a so-called “rainy day”.  

It is now reported that the American economy has over $5 trillion in cash sitting in checking accounts in banks and other places. Given that this savings rate would be deteriorating daily with the level of inflation, it is a pretty good bet that this money will either be spent or invested over the next 12 months. If spent, then the economy will continue to grow and if saved the financial markets will continue to go up.

As stability occurs in the economy, a greater percentage of this money will be spent creating a higher economy. Rather, if invested it will create a higher stock market going forward. One of the reasons that the stock market held up in this recent crazy time is the argument that there is really just nowhere else to put the money. Already the 10-year Treasury Bond is trading at 0.5% and is at a negative real interest rate. If you calculate the cost of inflation, the rate of return on that bond is likely negative at 1% per year. That means that every day that you hold that bond, you lose money after the cost of inflation. It is the same if you hold money with cash. You are losing money every day against inflation.

Lucy Wilcox, age 8, playing in the sand

Cash may give you a warm and cuddly feeling by having it on hand but the fact that every day you hold that cash you are losing the value of purchasing assets since the rate of return is now negative. So, the argument must be that I will hold bonds because I believe they will appreciate it the future because I know that they do not pay any rate of return. Remember that a $100,000 bond generates roughly $500 a year in income and every year that income is less than the cost of inflation.  

But now we have come to the point where bonds have actually run out of basis points to decline. The ten-year treasury is at 0.5%, it does not have much further it could fall. Couple that with the fact that the Federal Reserve is in an all-out war to create inflation. By virtue of the Federal Reserve, flooding the economy with money is a clear reason to try to increase inflation to increase the economy. Nothing could be clearer than recently the price of the U.S. dollar has fallen as the price of gold has gone up. Gold moves inversely to the U.S. dollar since most of the gold is held outside of the United States. But these are clear signs that the Federal Reserve’s effort to increase inflation is working. With a very low return on bonds and a very real possibility of increased inflation, you are locking in real-value losses by holding either cash or bonds. This is one of the reasons why the market continues to be held up, notwithstanding the avalanche of negative publicity.  

Three or four times a day, I am approached by investors saying “What if the Democrats were to win the election in November. Won’t the stock market suffer a major decline?” While certainly no one knows how the election will turn out, you must be prepared on all fronts. If the Democrats do win the election, and certainly if they win the Presidency and both bodies of Congress, I expect the market would decline, but not appreciably. The reason why it will not decline appreciably is for the reasons above - what are your alternatives? You may be in cash temporarily, but you will eventually migrate back to stocks. Will that period be a week, a month? Certainly, no one knows. However, it will not be long-term and certainly the period of time when the correction occurs would certainly not be worth the effort to trade around it.  

I get so very tired of hearing the pundits criticizing the stock market as being only for the wealthy. Their argument is that the average person’s life is not improved by the value of the stock market and, therefore, any attempt to make it go higher is only focused for the rich and not the middle class. Obviously, those people are not very well educated in economics or the wealth effect.  

First off, the general public is very much invested in the stock market. It is believed now that $2 billion per day flows into 401(k), 403(b) and 457 Plans which flow directly into the stock market. Fidelity Investments, the largest holder of 401(k) money, reported that during the March 2020 selloff, the 401(k) investors made little or no changes to their asset mix. This is the way it should be. Long-term investors should never react to short-term market fluctuations. It seems that 401(k) investors are becoming better educated on how to deal with huge market fluctuations that are principally controlled by market manipulators.

However, these pundits do not really understand the wealth effect. The wealth effect happens when the market goes up and money is withdrawn from those profits and spent on other things. Almost every day we have a client withdrawing money from their account to buy or construct something. It may be to buy a new car, it may be to go on vacation, but more times than not it relates to improving their home. 

Reid and Caroline Schultz watching the sunset on the water - ages 4 and 6

When money is withdrawn from the stock market and used to add an addition to your house, suddenly that money employs people. It employs people from the Main Street economy for both the construction workers and the people who build the materials. If a client takes money out of the stock market to buy a car, does that not put money in the pockets of the people who manufactured that car? There are so many examples o

f money coming out of the market to create liquidity to Main Street, for those pundits to argue that it is immoral to advocate stock market performance have, by the definition of the wealth effect, been proven incorrect.  

Every day we see the effect of low interest rates improving the economy. Housing sales are booming, and construction workers are working at maximum levels. As clients take money out of the stock market and benefit from lower interest rates to refinance their mortgage or add additions to their house, they create wealth, as almost assuredly inflation will positively impact the value of their home ownership. Every day we see the wealth effect taking place as the market moves up.  

The exact opposite happens as the market moves down. What you see are people who are invested that are less likely to take profits since the profits are lower and, therefore, there is negative wealth effect. It is not that investors use their excess cash to invest, but it is rather that they do not withdraw from their investments in a period of a down stock market. Over the last four months we have seen extraordinary gains in the stock market, and we are seeing extraordinary withdrawals to buy consumer goods. I do not understand how you could argue that this is anything but good for the economy.  

Since there is virtually nothing to watch on T.V. nowadays except for Major League Baseball, in my case, I often drift into old YouTube comedy routines. During my era, one of the most famous was the comedian George Carlin. I ran across a couple of his concerts over the last few weeks and enjoyed his complete “off the wall” look at his neighbors and the American economy. One that I found terribly interesting was his analysis of the fear of germs. In his way of thinking, this country has become completely neurotic, with the population in the U.S. obsessed with security, safety, crime, drugs, cleanliness, hygiene, and germs. His words, not mine. But clearly, he has a point since we have, in my opinion, so grossly overreacted to this pandemic that it warrants further discussion. My favorite example is how we have become so neurotic with germs that even in prisons they swab the prisoner’s arm with alcohol before giving him a lethal injection! Think about that for just a second. For a person that they are clearly trying to put to death, they are concerned that he might get an infection. Overreaction – no question.  

Each time I read the statistics of the pandemic, I wonder whether it is political in nature. Why are some states more restrictive than others when it comes to allowing the population to go back to work? In New York, as an example, they have still not even reopened their indoor dining rooms, yet they have announced that schools will be open in the fall. So, how does that even break down in economic terms?

The famous comedian George Carlin

If you analyze the various states for joblessness claims and those that are receiving benefits, it should be clear which states are abusing those rights and those that are not. In the most recent employment report dated July 18, 2020, 18.1% of all workers in the state of California are receiving unemployment benefits. In New York, that ratio is 16.3% and in Connecticut it is 15.2%. If, however, you compare it to other states, 3.6% of the workers in Iowa are receiving benefits, 4.5% in Utah, and 4.9% in Alabama. You do not have to be a mathematical wizard to see the contrast between those states that would prefer a change in administration as compared to those states that are likely not to want a change. Political – who knows?

The evidence is everywhere that the economy is improving, notwithstanding the horrific headlines you read daily. It is also fairly clear that earnings next year will rebound to normalized levels and, therefore, the value of the stock market is not overvalued, but is at a reasonable level. I do not expect a major downturn, but if there is, it will quickly recover and your long-term investment goals should be reached. This virus is a terrible plague on the economy, but it is time that all of us recognize what the risks are and move forward. We turned loose the American spirit and put Americans back to work at home, now we need to turn loose the American spirit and have the public eat in restaurants, fly on planes, stay in hotels, and move on with the rest of their lives.

The month of July also brought another recognition for Rollins Financial, Inc. It is a very humbling thought that for three years in a row we have been selected as one of the Top 300 Registered Investment Firms in the United States. That is really hard to contemplate given the scope of that recognition. To put it into perspective, there are probably 300 companies in the Greater Atlanta area alone that classify themselves as Registered Investment Advisors and we were in those that were selected out of all of the firms in the United States. I guess you can always say that it wasn’t an overnight success, since it took us 30 years to get here. When we received the recognition back in 2015 by CNBC TV as being the 20th best Registered Investment Advisors in the United States, we had $272 million under management. Today we manage for clients’ roughly ¾ of a billion in assets. Obviously much of our success is from the willingness of our clients to let us help them in planning for their retirement, but all of us should acknowledge the fact that we continue to grow and get referrals when clients make money. No other attribute is more important in the growth of a firm like ours. If we have not said so recently, we certainly appreciate all our clients that we help to reach their goals. 

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,

Rollins Financial, Inc.

Unleash The American Spirit. Put Americans Back To Work – The Good And Bad News

I walked down to my mailbox this Sunday morning and things seemed perfectly normal. I could actually write my name on my car due to the heavy pollen. It is a passage of spring in Atlanta to have the yellow pollen all over everything outside. It doesn’t do much for your sinuses, but it does mean that spring is coming.  

As I walk through the yard, I notice that the crabgrass and chickweed are growing fabulously well this spring. I have learned over the years if you cut the grass short enough, it all still looks green. As I walked back from the house with the morning newspaper, I noted that virtually no one was on the streets and the city was calm.

Josh (17) and Ava (2) taking a stroll to the beach

After driving to work, I can see that the world is not normal. Almost no one was moving around and clearly America has changed over the last 30 days. I could never have imagined, nor could anyone have expected, that the extraordinarily robust economy of America at the middle of February would have crashed to a halt by the end of March. The turnaround was exceptional by any definition, wherein the government insisted that private businesses close and suffer the economic consequences. Never in the history of America has this ever occurred. With all the major negative events such as World Wars, 9/11 and the financial meltdown has the government ever gone to private businesses and insisted they forfeit their financial futures?  

I will be the first to admit I know very little about the science of the virus. I cannot give you any recommendations or predictions on the spread of the virus or how to prevent or avoid it. However, I read the numbers every night and actually keep on my desk a scorecard of new cases. What I do know, without any involvement from the medical world, that we must put Americans back to work in order to save our society. Which is more important?

I intend to discuss all of these very interesting items, but I must report on the very negative financial news from the first quarter and the month of March. The Standard & Poor’s Index of 500 Stocks fell 12.4% during the month of March and is down 19.6% for the first quarter of 2020. Even with those dismal numbers, that index is up 10.5% for the 10-year period. The NASDAQ Composite fell 10% for the month of March and is down 14% for the first quarter of 2020. For the 10-year period this averaged 13.7% per year. The Dow Jones Industrial Average fell 13.6% during the month of March and is down 22.7% for the first quarter of 2020 yet remains up 10% a year for the last 10 years. The Barclay’s Aggregate Bond Index fell 0.2% during the month of March and is up 3.7% for the three-month period and for the 10-year period has averaged 3.9%. As you would expect, bonds did better than stocks. 

The first rose of the season at the Rollins’ house

During the quarter it was clear that investors were jumping out of the market and getting whatever cash they could reserve. It was an interesting period of time where virtually everything lost money. Even bonds went down before the magnificent efforts of the Federal Reserve came in to prop up the bond market. While many people characterized this as a bear market because of the standard definition of a 20% reduction, this bear market is unlike any previously. Other bear markets have been created because business was bad for one reason or another. In this particular case, business was not bad, it was great, it only became bad because the government insisted that it be bad. Now we have to evaluate whether and when the economy will once again start up for real.

I have to admit that the actions of the Federal Reserve have been remarkable and thank goodness we have a chairman of the Federal Reserve that saw the need and met the need by an overwhelming response to Americans as a whole. Fortunately, we do not have a Federal Reserve that sits back on its hands, as we did in 2008 and waited for the crisis to get here before acting. This time the Federal Reserve brought out the so-called “Bazooka” of help for Americans. While the skeptics are everywhere and the dire news floods the media, they just really do not understand the economic power that the Federal Reserve has unleashed. As I opened, I mentioned that I do not know much about medicine or the spread of this virus. However, I am pretty good with numbers. As of this morning, the weather channel reports that less than a thousand people in Fulton County have contracted the virus. The population of Fulton County, Georgia is roughly 1.1 million and that means that less than 1/10th of 1% of the County population has contracted the infection. There is no way of knowing exactly how many have recovered, but let’s assume that reported number is correct. If that is in fact correct, then over 99% of the population has not contracted the virus and deserves a right to earn a living in this weird economy. I am not suggesting that Americans be allowed to go back to work immediately, but I am suggesting that come May 1st, businesses and businesspeople be allowed to resume their economic life.  

I have never seen a situation where we keep a daily tally of sick people. If you look at the most recognized chart on the subject, as I write this posting, there is roughly 1 million net cases in the entire world. If that is the case that means that there are seven billion people that do not have the virus. My point is you cannot deprive seven billion people from making a living by governmental intervention. Free society will only survive if businesses are allowed to fend for themselves. We will never be able to solve the unemployment issue in America until these companies are allowed to work. This is a case of clearly some have never stopped working and yet specific industries are all but shut down by governmental intervention.

A funny, and too true, quote

There are enormous economic benefits that are occurring right now to help the economy. I read all of the financial press comparing the current situation to the recession in the 1930’s or the recession that followed the 2008 financial crisis. I read about the depressed world after 9/11 and after the dot-com explosion around the turn of the century. While each of those financial realities were severe, not a single one of them had the calvary coming to rescue the economy as we have today. How will all of this work in the future? No one knows. However, I have studied the economics and cannot be as negative as the financial press seems to be. 

Ava working hard on her homework

Already the Federal Reserve has come in to create liquidity in the bond market and the municipal bond marketplace. In addition, they have guaranteed the money market accounts and have moved liquidity throughout the economy. In 2008 if they had moved so quickly, a large portion of the financial decline would have been avoided. The true winner, and the move that might save millions of American jobs, has been the Treasury and the Federal Reserve working to create liquidity. The announcement of the $2.2 trillion in financial stimulus that the government is in the process of handing out, is beyond amazing. First you must understand that virtually all of this money is basically a gift. The $350 billion gifted to small businesses is an outright gift. It is not a loan; it can be forgiven if businesses continue to pay their employees. The stimulus checks that will go out in late April or early May are an outright gift. They do not reduce your taxes and it is money that you will not have to repay. Americans, being Americans, most likely will spend this money immediately, creating commerce. None of this has ever happened before.

I understand the economic effects of a $2.2 trillion stimulus package. When I was studying economics in college, we learned that the velocity of money has a seven multiple. What that means is that you spend a dollar at the grocery store and that dollar is used to pay an employee and that employee uses that money to buy food and the restaurant pays their employees, etc. Basically, the same dollar is spent seven times in an economy before it is completely extinguished. Under that assumption, you also assume that at some point a portion of that $1 is saved. I doubt very seriously that in the economic upheaval that very many will be saved, but I understand the effect of this $2.2 trillion. If you assume that the multiple is seven times, you are talking about an economic stimulus to the country of $15.4 trillion over the next several months. When we talk about trillions of dollars, most people have no concept of exactly how much money that is. Maybe I can give you an illustration to better understand.  Remember months not years!

With a GDP potential of $15.4 trillion, we are talking about pumping into the economy a potential GDP that is greater than the entire GDP of the country of China in one year. Let me emphasize again, we are talking about creating, in this country, a potential GDP greater than the entire economy of China over a one-year period and we are talking about creating it in 90 days. A further illustration would be that this amount of money is over 3.5 times the entire GDP of the country of Russia for an entire year. Never ever in any economy anywhere in the world has there been such an enormous amount of money injected into the economy over such a short period of time. If anyone out there tells you that they understand what the economic effect of this will be, they are clearly delusional since it has never happened before.  

Whether or not this will work, of course, is the major question. However, there are a few examples of a smaller situations occurring. During the 1930’s, Franklin Delano Roosevelt created the WPA (Works Progress Administration). F.D.R. was a big believer in putting people back to work, but not outright gifts. They created jobs for people to help them out of The Depression and paid for it with the government’s money. At that time, it was believed that there were 10 million jobless men in the United States. The WPA effectively put three million of those back to work creating national parks such as Yellowstone and huge infrastructural jobs such as building highways, schools, hospitals, airports and playgrounds. Of course, one of the most notable achievements of WPA was the building of Hoover Dam, which controlled the water through the Colorado River through Nevada and opened up an entire state with water that can be used to grow food, etc. Much positive work was done from the WPA, and by 1940, the country moved into a much stronger financial economy which accelerated during the years to build up for the war effort beginning in 1942. I understand that the Public Works Program took years to implement and put the money in the public. What we are talking about in this case is not years, but months, and there is no time for government planning. These amounts are going to small businesses which are outright gifts to the economy.

As this money starts to flow from the government out into the public, you are going to start to see businesses start back up. There is no question that many businesses will never reopen, but the vast majority will give it a try. This money will allow them to pay their employees, rent, and operating costs. The question will be whether the public will use their businesses as they have in the past. I am betting for the American spirit that the public will once again support private business and shop at malls, go to restaurants and buy things online, as they always have. I understand it will be a slow process for people to develop confidence, but too many people seem to miss the point that a great many Americans have been paid during this shutdown. Most employees have not lost their jobs and they have been hunkered down through April 30, for at least six weeks. There is a huge build up of demand since they have not spent their money on restaurants, travel or their normal pleasures.  I am betting on what I believe to be a fact, that once Americans are free to spend money again that they will accommodate the economy by participating.

Ava and Dakota enjoying the beach

Yes, I can tell you a lot of negatives regarding this program. Just so that there are no misplaced illusions of how this is happening, this is a situation of the government printing presses working overtime. We are lucky that we have a country where all we have to do is throw a switch and print more money. Yes, I understand this is never a good thing, but in this particular case, it is required. The government does not have the time to issue bonds to pay for this huge amount of money. It must finance it internally, and that means getting the printing presses to work. Yes, eventually they will have to issue bonds to support it and that is a long-term negative when it comes to the national debt. Yes, we all worry about what will happen in the future for our children and grandchildren with the national debt, but as the Secretary of the Treasury said recently, “Now is not the time to worry about debt!”

Almost assuredly what will be created with this huge flood of money into the economy over the short term is inflation. Inflation is not always bad (in moderation). Inflation makes companies’ inventory more valuable and real estate values will go up. I am betting that as we get back to normal, residential real estate will increase in value due to the low interest rates and the potential inflation effect of house prices. If that is the case, that will be a welcome economic event. We can live with inflation.  

I could point out many of the negatives of printing money. During World War II, the world was fascinated by the economics of Germany where essentially a relatively small country took on the rest of the world in war. How could such a small country afford armies large enough to basically conquer the world? It was pretty simple. They just printed more Deutsche Marks to pay for everything. As the war progressed, the Deutsche Marks continued to lose value and inflation was running at a 1,000% or higher per year. It got to the point where inflation was so bad that the German government was required to pay the soldiers on a daily basis since money would be worth much less the following day. Much of the same has happened in Argentina and Venezuela today where inflation runs at a 1,000% annualized rate due to the printing presses working overtime.  

While that certainly is a potential negative, the ability that the United States government has to finance debt is extraordinary. The U.S. dollar is still the safe haven of the world and no country has the ability to print money and absorb it into the economy as the U.S. government has. I think there is no question that this entire flood of money will create inflation over the coming year, but I also know that the upcoming inflation will be welcome. If you are talking about investing in bonds that pay nominal interest rates, inflation will almost assuredly impact these bonds negatively. The 10-year Treasury bonds earn less than inflation.  

So, what is the timetable to get back to normalcy? We now know that the country is in essential lockdown through April 30th. April will be a most difficult month as the number of cases go up and the deaths occur. But look at China’s example and you will get some clarity. China first recognized the virus outbreak at the beginning of 2020. Three months later the country is back almost operationally at 100%. McDonalds and Starbucks report that all of their retail stores are open in China and manufacturing has recovered over 80% of its prior production. People are back at work earning salaries and the economy is going to pick up. So, if that three-month recovery period in China is the same as we will witness in the United States, then recovery should be realized by May 15th. Not full 100% capacity, but certainly a good start.  

The first real recognition of the virus in the United States was around February 15th and three months would get us back to May 15th. If we get back to work around the first of May, I see realistically May 15th as potentially being a recovery time period. While we all feel sympathy for the people that have died, there does not seem to be any perspective of the numbers in the media. As an example, in China less than 5,000 died by virtue of the virus. Now, you can question the numbers all you want since no one will ever know the exact number of deaths. But if you put into perspective in a normal year in the country of China, ten million people die per year. Ten million people die without the virus and 5,000 deaths due to the virus is hardly a rounding error.

We have to unleash American spirit to get going. We need baseball and basketball to begin again on May 1st. We can play without fans, but we need to get playing. Both of these leagues have enormous financial capabilities and they can test every single player and person in that stadium daily to see if they are well. To operate a baseball game without any fans, you are talking about less than 200 people to make it happen. You could easily test those people every single game to avoid any sick people. A professional basketball game would take even less people to operate. To assume we cannot function in empty stadiums borders on ridiculous. We can turn them loose so the American spirit can once again increase out of this incredible discomfort.  

I have no idea what or why the media is fixed on this subject. My reading of the media at the current time would be that no American will actually ever go back to work. I really cannot get my hands around whether this incredible flood of negative information is designed to further hurt the economy or if it is to be a public service. Might their negative publicity be to hurt the economy, by hurting the economy it becomes a political realization. I would hope that were not the case, but given the exaggeration and almost hyperventilated reporting, you would have to believe it was. 

Joe, Ava and CiCi in matching shirts

So, the question that everyone wants to know is when the stock market will recover. I guess I will have to quote my favorite quote-master Yogi Berra. “It’s tough to make predictions, especially about the future.” Yes, Yogi was very good in explaining things in his own sort of way. I have to admit, I do not know when the stock market will recover, however I know that it will. It will move to new highs.  

There needs to be a better understanding that many businesses have operated through this down-cycle and have prospered. Obviously, the grocery stores, online sellers and computer companies have continued to operate and prosper. There will be winners and losers at the end of the day. However, I am convinced that once this $2.2 trillion starts running through the economy, there will be a quick return to normalcy. Admittedly, we will never be what we were. Social distancing will continue for years until a proper vaccine is prepared, but much work has been done already and antibodies have been created that will help people get well. The American ingenuity regarding healthcare and cures will be funded by governmental money at unprecedented levels. I have high confidence that by late summer, we will see significant progress.  

So, it appears that the first quarter will be a slightly negative GDP and the second quarter will probably be negative by at least 10%. But it looks like to me that by the third quarter, the GDP will basically break even and by fourth quarter, marginally positive. If those predictions are somewhat accurate, by the end of the year stocks will have gained back much of the losses that we have incurred. To not be invested now is a mistake.

Actual tickets to the Beatles concert in Atlanta.

August 18th, 1965; $5.50 each ticket

I get a lot of clients and I hear a lot of commentators complain about the swift losses that we have incurred, which is unprecedented. Yes, the speed in which it occurred is unprecedented, but the losses are not. For the first three months of the year, the S&P 500 Index was down 19.6%. It has been an extraordinarily painful downfall, but certainly not unprecedented. As early as the fourth quarter 2018, the S&P was down more, percentage-wise, in that quarter. And what happened after that date?  In 2019, the S&P Index recovered a sterling 31.9%. 

So you ask, as you should, when will the market recover? None of us actually know, we just know that it will. It always has. Unlike 2008 when the market went into Bear Market conditions, it was for a very good reason. A large and important section of our economy was broken. The banks were essentially broke and they are the cornerstone to American finance. In 2020, the banks are stronger than ever and will benefit from the stimulus.  

In 2008 we did not have the intervention of the government to basically give away free money to create commerce. No one knows what the effect of this will be, but as pointed out above, it is likely to be extraordinary. So, while I think the market is going to continue to be volatile, the trend will eventually be up. It makes me sick to watch the machines operate on Wall Street every day going up or down 500 or 1,000 points on a regular basis. These machines are not investors, they are spectators.  

I wish I could explain to investors that these moves are not investing. They are outright speculation and mean nothing long-term. Yes, your portfolio is down, but America is not down for the count. If you believe, like I do, that recovery is four or five months away, giving up on America is always a bad choice.  

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

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

Best Regards,
Joe Rollins

Why We Are Not Panicking

Stock market declines and corrections, like the one we are enduring now, are always frightening for investors. Yesterday, markets logged steep losses, even triggering a pause in market trading as indexes surpassed the 7% threshold. This followed a string of volatility which has seen the S&P 500 drop roughly 20% since the market closed at an all-time high on February 19. While the Coronavirus had been the recent culprit for stock market weakness, the market action yesterday was exacerbated by the price war on oil between Saudi Arabia and Russia. Crude oil dropped almost 25%, while many energy stocks were down 20% or more in one trading session.

This particular event may be resonating with us a bit more than the typical stock market correction because the Coronavirus outbreak is affecting more than our financial assets and investments. We have spoken with lots of individuals whose personal lives and business dealings have been affected in some way by travel restrictions or the threat of the virus.  

We believe the recent Coronavirus outbreak is likely to be a short-term disruption to the economic prosperity we have experienced since the aftermath of the financial crisis in 2008. Incidentally, the market bottomed on March 9, 2009, and was 40% higher within a few months. We have no way of knowing yet whether March 9, 2020, will mark the bottom for this particular correction. Still, there is precedent for the market being significantly higher following a sharp correct just months later.  

Through February, the economy has been doing quite well as the jobs market remained quite strong. But, then the Coronavirus interfered with many supply chains and customers in China. It has turned into an event that potentially will have a negative economic impact for at least several months.  

However, our base case is that these economic disruptions will probably be temporary in nature. Markets will likely recover in the months ahead as societies all over the world work through this new threat and how to properly contain the spread and develop treatments.  

We do not yet know for certain how this outbreak will play out, either in human or economic terms. But in the aftermath of previous epidemics like Ebola and SARS, the markets have been higher 6 and 12 months after the outbreak started without exception.

In addition, the Fed has already reduced interest rates, with more reductions likely to come. Mortgage rates have dropped significantly, encouraging borrowing and refinancing that is likely to save consumers thousands of dollars in annual interest costs for the duration of these mortgages. Fiscal stimulus in the form of tax cuts and other support are also being considered. 

While we acknowledge some uncertainty with this situation, what we do know is that staying invested for the long haul has been wildly successful. Unfortunately, we are required to endure volatility to enjoy the fruits of staying invested. In fact, cashing out of investments and missing impactful rebounds can cost your portfolios severely.  

We would recommend doing the following:

• Stay disciplined and remain invested. Often the best stock market days occur during heightened volatility. Missing the best days can significantly reduce your long-term returns. Going back to 1930, if you missed the best ten days in each decade, your performance would have been reduced to 91% instead of nearly 15,000% return.

• Consider making contributions now. Consider front-loading your annual 401k contributions with stocks selling at a 20% discount compared to a few weeks ago. This suggestion also applies to those yet-to-be-made IRA and Roth contributions. Be mindful of how this might affect your matching contributions. Or possibly keep this in mind should prices fall a bit further.

• Review your financial plan. We prepare and update plans for our clients daily. As mentioned, we think investments are likely to rebound in the months ahead. Updating your plans and reviewing your overall financial objectives are often a great way to evaluate your sustainable patch, despite the recent stock market correction.

• Rebalance your investments. We view the current situation as a potential opportunity to add to your equity positions. At Rollins Financial, we review your investments regularly and often rebalance each quarter, but sometimes, we do assess all situations more often than quarterly.

We invite you to discuss your portfolio, your financial plan, or thoughts specific to your situation with us. We continue to monitor all of the client investment accounts and the forward-looking investment strategies we are recommending.

My Long History with the Atlanta Braves

There is not a great deal of new information to report for the month of September 2019. Although the markets were extremely volatile during the month of September, the upward trend remains intact. It seems like every headline was filled with someone or another forecasting a recession just around the corner. Also, the headlines were full of political news due to the upcoming 2020 Presidential election. While presidential elections should, in my opinion, have absolutely no impact on financial markets, they almost always do. 

Since there was not a whole lot going on financially, I would like to relay my history with the Atlanta Braves. The Atlanta Braves are currently in the playoffs and at this writing no one knows what the outcome will be. However, I became a season ticket holder in 1989, so this marks the 30th year of my participation. Over that time, as you will read later on, there have been many ups and downs throughout my attendance. 

Ava's first baseball game

Before I get to the more interesting part of this posting, I must report the financial results for the month of September. For the month of September, the Standard & Poor’s Index of 500 stocks was up 1.9% for the month. For the year 2018 through September, that index is up 20.6% and the three-year performance is 13.4% and the ten-year performance is 13.2% annually. The NASDAQ Composite was barely positive, up 0.5% for the month, up 21.5% for the year 2019 and up 15.9% three-year period then ended at a 15.5% for the 10 year annual returns. The Dow Jones Industrial Average was the winner for the month at 2.1% and that index is up 17.5% for the year, 16.4% for the three-year period and 13.6% for the 10 year period. Just to form a comparison, the Barclay’s Aggregate Bond Index was down 0.6% for the month, but is up nicely for the year 2019 at 8.4%. For the three-year average it is up 2.9% and for the 10 year average it is up 3.7%. Even though bonds are having a very respectable 2019, the ten-year returns are roughly one-third of what any of the major market indexes reflect.

One of the most important components of understanding gross national product (GNP) in the United States is to realize how it is calculated. Over the last three decades the U.S. economy has shifted from a factory environment to more service-oriented. As a matter of fact, the service index greatly outweighs the manufacturing index, and more importantly, consumption or consumers themselves represent roughly two thirds of the calculation of the GDP. It seems that the U.S. was perfectly willing in the 70’s and 80’s to allow manufacturing to lead the United States overseas. China was the major benefactor of that transfer of manufacturing and since they had more favorable labor rates than the U.S., the U.S. government was perfectly willing to take that over. Now we want it back!

There is no question that the U.S. is dominant when it comes to services, and certainly dominant when it comes to technology formation, but the real challenge is trying to determine without manufacturing exactly which way the economy is going. The last several months we have seen major swings in the equity markets based on assumptions from others that the economy is either moving ahead or moving down. As I have pointed out in these writings before, the most important component by far in calculating the trend of the market is the number of actual people working. If you have a job and you support your family, you will consume. You will pay for food, transportation, and even some entertainment. The more people working the more people will add to the economy. The most important function that any government can do is to keep American workers at their jobs. It seems 2019 will be a record in every regard when it comes to employment.

Josh and Carter Roberts are engaged! Wedding plans are underway for next summer!

On Friday, the government announced that the jobless rate in the United States had reached 3.5%, which is the lowest unemployment rate in this country in 50 years. Just let that information sink in for a second. There are more people working in the United States now than ever in its history. Yes, the unemployment rate was lower previously, but the number of Americans has increased dramatically over the last 50 years and now more people are working than have ever worked in this country before. Given the outrageous political exclamations that you see on the news every day, do you not find it comforting that so many people now have jobs and employers are actually seeking more employees than are available? 

You really have to read a report on the unemployment rate to understand how wonderful the news was. In this report for September, the unemployment for workers with less than high school diplomas dropped to 4.8%. Think about that just for a second; workers below college level now reach a rate of 4.8%, which by definition is below the perceived full-employment rate of 5%. Even more good news was that joblessness among Hispanic men declined to 3%. This level of unemployment by Hispanic men was the best on record tracing back to 2003. Therefore, the number of employed with less than a high school diploma is the best that has ever occurred since 1992, when the labor department first began reporting this index. The Hispanic rate is the best since 2003. 

One of the true indicators of a good economy is how broad the employment was. So many politicians argue that the workforce is tilted toward the rich and not the everyday workers. As you can see from this employment report, employment is strong throughout the workforce, including Hispanic workers and the less educated. 

I guess I get somewhat weary about discussing the economy when you see such tremendous coverage given to unimportant economic facts. Just last month we were awakened to the realization that Iran had used drones to bomb the refining manufacturing plant in Saudi Arabia. Suddenly, the price of oil jumped up 10% despite the U.S. buying virtually no oil from Saudi Arabia. As the price of oil went higher, the equity markets went lower under the fear that the U.S. would initiate war with Iran. Many of the forecasters on television espoused the military prowess of Iran without bothering to check the facts. Surely, if the United States would enter into a prolonged war with Iran the price of oil would double, and the economic effects would be crippling.

First off, we do not buy oil from Iran, nor have we for decades. Secondly, our consumption of oil from Saudi Arabia is very low. But most importantly, the Iranian army is not much of a threat. They barely have an Air Force that flies and few Navy armaments. Do you realize that the economy of Iran is not even as big as the GDP of the state of Georgia? During this month, I heard a military assessment of the Iranian military indicating that it would take maybe one full week to take out all of their military installations. But none of us want war with anybody, including Iran. Their economy is in complete disarray, they are controlled by a dictator and their own people hate their government. Isn’t it interesting that everyone wants to come to the United States, but hate us so much? 

Partner Danielle Van Lear with Josef Martinez of Atlanta United

I read an article this month about the nuclear financial bomb that the Chinese could deploy against the United States. Not a nuclear bomb in the form of nuclear energy, but a nuclear bomb in the form of debts. Several prognosticators say that if China really wanted to hurt the United States that they could just drop all of their U.S. Treasury holdings in one fell swoop, destroying the U.S. economy in the process. Once again, do these people even do any research?

Yes, it is true that the Chinese hold roughly $1 trillion in U.S. Treasury Bonds, but do not forget that there is currently $22 trillion in U.S. government debt outstanding and, actually Japan holds more than China at a little over $1 trillion. However, 70% of the U.S. Treasury debt outstanding is actually held by the U.S. government itself. For many years the Social Security system has bought treasury bonds with its excess Social Security payments that it receives through tax withholdings. So, even if China were to sell all of their bonds in one sitting, it would hardly affect the price of U.S. Treasuries given that it represents only 4% of total outstanding bonds. Further, the Chinese realize that selling these treasury bonds would create a huge swing in their currency by strengthening it by virtue of selling U.S. dollars and buying local currency. The last thing the Chinese want to do is strengthen their currencies, making their export prices expensive and, therefore, their manufacturing less competitive in the world markets. You can forget about that fear.

Once again, the issue with Russia this month came up and what effect Russia would have if they tried to pursue further aggression in Eastern Europe. I almost laugh when people on television use this as a reason for the markets going down. I only need to remind you that Russia has GDP that is actually less than the country of Italy. I don’t think anyone is afraid of Italy and certainly no one accuses them of working too hard.

So we morph into the political arena of the potential impeachment of the President of the United States. Once again, a headline that means absolutely nothing in the whole scheme of things. While it is possible that the House of Representatives could impeach the President of the United States since the Democrats have majority, an indictment in the Senate would require a vote of two-thirds of the members and, since the majority of the Senate is held by Republicans, that is not a reality. So why are we spending all of these hours of talk and discussion over something that clearly could not possibly take place? In my mind, it has more to do with the fact that Congress is frozen with inactivity. They cannot pass even the most simplest of bills since they spend all of their time on conspiracy theories. When will Congress actually do what they were elected to do so we can move on with the country’s business rather than this silliness? Isn’t there an election next year?

There is no question that the President is a lightning rod for virtually all Americans. However, it must be said that he has accomplished many of the goals that he laid out in the campaign by reducing unemployment, being tough on immigration, and holding other countries accountable for their excess of unfair trade with the United States. In doing so, he has offended virtually everyone; which is okay with me. I think comedian Dennis Miller may have put it better than anyone else when explaining about current President Trump. As Dennis Miller said, “The simple fact is that if Trump was vaguely presidential, he wouldn’t be President”. I think that pretty much explains the situation. With the fabulous economy we enjoy today, the Democrats fully realize that they are not likely to beat this President at the polls so they must distract the attention of the public away from the economy. 

So, my new worry is if Senator Elizabeth Warren were to win the democratic nomination and the Presidency, what effect would it have on the markets? Remember, she has openly wanted higher marginal tax rates, hikes in capital gains rates, and a higher tax on dividends. In addition to all of that, she wants a wealth tax on the richest people with a net worth more than $50 million. The net effect of higher taxes is to take money out of the pockets of consumers and turn it over to the government to allocate. Maybe that would be better, but not according to the economics books I read. 

Medicare for all sounds attractive on paper, but consider how it would be run. The government does virtually nothing better than the private sector except defense. If you want your health program run by your local DMV, that’s where it ends up. I cannot even fathom that being a logical solution for most voters.

Regardless of what you hear in the financial news, the economy is still doing well. Surely there have been pockets of weakness but with the Federal Reserve now cutting interest rates and with the lower tax rates that are currently enforced, it would certainly not surprise me to see earnings actually up in the fourth quarter on a year-by-year basis. In summary the three components of higher stock prices are firmly in place. Interest rates are low and getting lower, earnings are high and stable, and the economy is strong and resilient and is likely to remain so for two years to come. Based on that trifecta of positive economic news, we expect equity prices over the next year to be higher than they are today. 

I had to force you to read all of the updated financial information to get to the entertaining part of this posting. My history with the Atlanta Braves goes back, in many cases, before many of you were even born. I never started out to be a huge baseball fan; it just seemed to fall into my lap and has become an integral part of my past and hopefully future.

When I was attending Georgia State University to get one of my three graduate degrees, I did so at night after work. At that time, I was single and really had nothing else to do, so after school I would drive over to the old Atlanta Fulton County Stadium and park right outside the main entrance. In those days it was not uncommon that they would only have 3,000-4,000 people at a game. I would buy a General Admission ticket for $2, or oftentimes it would be so late when I arrived that they would not be collecting admission. You could go in the general admission part of the stadium, walk around and sit directly behind home plate since those seats were rarely used. I watched many games during the 1972-1976 Hank Aaron era. I would conservatively say I probably saw Hank Aaron hit 100 of his 755 homeruns during that time. The Braves rarely won, but I admired the ability of certain members on that team.

Josh, age 2, enjoying the Braves (1997)

Josh, age 3, at a Braves game (1998)

My real participation started in 1989. As many of you know, I had a long history with the former WTBS announcer Craig Sager. Not only did Craig and I have the majority ownership in the sports bar Jocks & Jills, we also had a long personal relationship before he died a few years ago. Craig had a difficult personality in a lot of respects. He was sure he knew everybody, and he could open doors no one else could open. In 1989 Craig agreed to buy four season tickets on the second row behind the dugout at Atlanta-Fulton County Stadium. The interesting part of that story is that while he agreed to buy them, he never had any intention of paying for them. When the invoice came due, he forwarded it to me since he thought maybe I would enjoy having them. At that time, four season tickets to the Atlanta Braves was outrageously expensive and clearly, I did not feel like I could afford them. However, since they were good seats and since Craig Sager had arranged them, I went on and purchased them. During those days the Braves were not very good, and I could hardly give the seats away. Who would have ever thought that in 1991 the Braves would go from last to first place and go to their first World Series game? 

Due to these season tickets, I was honored to go to the World Series in 1991, 1992, 1995, 1996 and 1999. How many people can boast that they have actually attended World Series games in five years during the 1990’s decade? I was even there the night that Atlanta won the World Series in 1995. Tommy Glavine pitched a shutout and David Justice hit a homerun that won the series against the Cleveland Indians. I was there when they won 17 straight division championships; it has been a good run.  

I have seen many interesting things and being with the Atlanta Braves has played a major part in the upbringing of my children. The first time I can recall taking Josh to a game was the September 30th, 1997 playoff game with the Houston Astros. At that time Josh was only 2 years old and as you can see from the picture, he fell asleep shortly before the first pitch. Later, when he regained some knowledge of what was going on, I thought it might be interesting if I got him a baseball from the field. I had come to know Braves shortstop Jeff Blauser quite well, so as they were coming off the field, I motioned to Jeff to throw me a ball so I could give it to Josh. When he did, I handed it to Josh to which he immediately threw it back at an unsuspecting Jeff – luckily he dodged it in time. I still have that very baseball in my office. 

I was also there in July of 1993 when the press box caught on fire. As you can see from the picture I took that night, it was quite an event and the game was delayed for a couple hours before finally putting out the fire. 

Press box on fire 1993; David Justice and Deion Sanders

I was also there during the World Series in 1992 when Deion Sanders played for both the Atlanta Falcons and Atlanta Braves during the same season. Quite a media storm occurred when Deion would leave the Atlanta Falcons practice field and fly by helicopter to Atlanta Fulton County Stadium so he could play in the World Series. I was also there when they traded Deion Sanders to the Cincinnati Reds and completely destroyed the morale of the team that year. Deion was a huge fan-favorite, but not until later did we find out that behind the scenes he was very disruptive to the team and not the type of player Bobby Cox was used to coaching. 

I was also there for the very last game in Atlanta-Fulton County Stadium, which was an eerie experience. Even though that stadium was clearly a dump by any standard, it was all I really knew when it came to professional baseball. It was pretty crazy to see the players come on the field at the end of that game, with David Justice walking around the stadium with his handheld camcorder to memorize the event for himself. As you know, in 1996 the stadium was imploded to make room for the new Turner Field which would be used in the 1996 Olympics.

Moving over to Turner Field, we had exactly the same seats and went through many memorable events there as well. I was there in 2000 when Sammy Sosa bounced homeruns off the 755 Club as he won the Home Run Derby. Looking back on the event, it should have been self-evident to everyone that steroids played a large part in his success given that those shots were well over 500 feet. The 2000s were not as successful for the Braves, but many of my clients were able to use those tickets since we have sold them to them for half-price for 30 straight years. Many interesting things happened during the 2000’s, but we never reached the success that we had in the 1990s. I even got to throw out the first pitch at Turner’s Field in 2005.

One memorable event that did happen at Turner Field was that of an unfortunate foul ball. Despite having tickets for 30 years now, I have never once actually caught a foul ball. It really could be said that I have never even been around a foul ball. They have been hit in my area, but I never really had a shot at catching one. I have been given over 100 balls by players coming off the field, but a foul ball, I have never caught. 

In 2016, Dakota, Josh, and I took Ava to a Braves game. At that time Ava was about five years old. At some point during the game, a ball ricocheted off the dugout and actually hit Ava in the arm. Josh and I are both large people, above 6’4 in height, so the fact that a foul ball could find her between the two of us was quite remarkable. She was not badly hurt but, as you would expect, the medics quickly rushed to her to make sure no damage was done. It definitely made a lasting impression; her explanation when asked to go to any games after that was “Daddy, football hurts”. That led us to change seats at the new SunTrust Park. Now we have seats adjacent to the home plate on the eighth row; close enough to see the action, but behind a protective screen. Yes, we were there when Ronald Acuna, Jr. had a Grand Slam against the Dodgers in the 2018 playoffs. This team is exciting, but I guess it really makes no difference. I intend to be a season ticket holder for the next 30 years and whichever team they field, I will be there. 

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

Don't Let the Machines Lie to You - Trust the Fundamentals, Not the Hype!

Back when I wrote the blog on November 6, 2018, Everyone loves a great conspiracy theory, I have one…, I really did not have an answer to the market’s volatility. I suspected (and expressed so in the blog) that there were forces creating the volatility that made no sense and certainly did not represent the fundamentals of the U.S. economy. I was not given the answer until December 26, 2018, the day after Christmas, when the Wall Street Journal published information that supported the theory that I had previously proposed.

Yes, it was a very disappointing year from virtually all financial aspects. Even though the U.S. economy was strong and continues to express strength going forward, the major market indexes finished negative for the year. And yes, I recognize that this negative performance was well below my forecasted gains for 2018. I believed then, and I believe now, that the fundamentals were very strong and will continue to be strong into 2019. What I did not adequately forecast, nor had any reason to believe, is that the machines would spoil our Christmas season by creating losses that were unwarranted by the fundamentals. Hopefully, I can explain all of this to you in this blog, not in the spirit of sour grapes, but rather as an educational process to learn more about how the markets react to given conditions rather than react to basic fundamentals.

Lucy & Harper Wilcox with Santa

Robby, Danielle, Caroline & Reid Schultz

On a seasonal basis, the period of time from November through May of any given year is historically supposed to be the best time of the year to invest. That is particularly true for December, mainly due to pension funds reallocating their assets and putting money into plans to meet their year-end funding requirements. For that reason, it is particularly unusual to see such a huge draw down in the markets for the month of December.  

In fact, it is now said that December 2018 was the worst December in the equity markets since 1931. To really understand how absurd that comment is, you would have to compare the economics from today with those from 1931. This year, we are enjoying 3.7% unemployment, while in 1931 and 1932 the unemployment was 15.82% and 23.53%, respectively. GDP in 2018, the difference in those numbers is not even close. It is anticipated for the entire year of 2018 that the GDP will grow roughly 3%. In 1931 and 1932, the GDP was -6.5% and -13.1%, respectively.  

So, in 2018, we had truly extraordinarily high growth numbers and low unemployment, while in 1931 and 1932 we had huge unemployment numbers and negative growth. To assume they are even comparable certainly creates a conundrum in my mind.

As I scan through the financial advertising that you see on the internet, I am always baffled by the headlines that attempt to scare investors into investing in safe products by stating that stocks could go down 75% next year. As I read those advertisements, I reflect on the fact that over the last 16 years the market has only been negative two times. If you do the math, that is a win rate of close to 88%. Given the chart, where the compounded annual rate of return over the last 16 years has been 8.96% and the average at 10.33%, I always wonder why clients have such fear of the equity markets. Clearly, over this timespan, no asset class has even come close to performing as well as equities.

After an outstanding year in 2017 with the S&P 500 up 21.8%, I guess you could expect a pullback in the performance. This really happened with vengeance in the fourth quarter of 2018. There is nothing good to say about this performance since several of the indexes fell into bear market territory and a selloff occurred in all asset classes. The Standard and Poor’s Index of 500 stocks ended the year down at 4.4% for 2018. The NASDAQ Composite ended the year down 2.9%. The Dow Jones Industrial Average was down 3.5% for 2018. Since the 2018 numbers and the one-year period are identical, you end up with exactly the same numbers for the one-year period then ended. If, however, you stretch out to the three-year period, the S&P ends up with an annual return of 9.3%, the NASDAQ Composite up 11.1% annualized and the Dow Jones Industrial Average up 12.9%. Just for the purpose of comparison, the Barclay’s Aggregate Bond Index was exactly even for 2018 and has only realized a 1.9% annualized gain over the preceding three years.

As pointed out previously, the markets have only been down twice over the last 16 years. However, the fear expressed in the financial publications would lead you to believe a much higher percentage of losses. As indicated in the chart above, do not be misled by the hype, but rather evaluate the actual numbers and see that over the last 16 years you had an 88% chance for profits.

Needless to say, I was really disappointed to see the markets sell off during the final quarter of 2018. At the end of the third quarter, the market was up a sterling 10.6% and it looked like we were on track to have another great investment year. However, in the first of October, the Federal Reserve Chairman gave a speech that rattled the markets. In his speech, he indicated that he would like to bring interest rates up to a neutral level. And what really rattled the markets was when he said, “We’re a long way from neutral...” At that point, despite the very positive fundamental aspects of the U.S. economy, the markets sold off indiscriminately. As I then pointed out, I was not exactly sure why the market was going through such huge swings, but now we have an answer.

In an article published on December 26, 2018, the Wall Street Journal quoted the following: “Behind the broad, swift market slide of 2018 is an underlying new reality: Roughly 85% of all trading is on autopilot – controlled by machines, models, or passive investing formulas, creating an unprecedented trading herd that moves in unison and is blazingly fast.” So, as my post on November 6th was speculating, there was in fact a true conspiracy theory that was affecting the markets. I highly recommend that you read this article and others on the subject. It is very important to understand that this type of trading has nothing whatsoever to do with fundamentals, but rather momentum. So, when we had the original sell-off at the beginning of October 2018 with a sharp move down due to the Chairman of the Federal Reserve’s comments, the program machines kicked into action trading on the momentum. As the Wall Street Journal quoted, “When markets turn south, they’re programmed to sell. And if prices drop, many are programmed to sell even more.” 

So, as I suspected during this time of high volatility, we were seeing massive program trading affecting the market rather than there being some actual fear of recession or any other type of financial concerns in the economy. As I expressed in the blogs during that timeframe, there clearly just was not any type of reasonable fear for recession in 2019 and all other major fundamentals of stock market investing continued to be strong. I guess I have to admit that this type of program trading clearly interrupted what would have been otherwise a fabulous investment year and scared our clients into believing that something more dangerous was at hand. Remember that the machines do not trade based on fundamentals; they trade based on momentum. Since momentum and direction were down in the fourth quarter, huge sell programs overwhelmed the market that had low volume and participation during the holiday season and created huge swings both up and down, but the upside was much less regular.

Another thing that really irritates me about the performance in 2018 is that I was not wrong. I correctly assessed the economy and correctly evaluated all of the components of higher stock prices and reported them to you. What I did not and cannot project is how the machines will react to current information. You cannot reason with a machine – it trades because it is programmed to do so, not because of the strong fundamentals of the economy. However, with that said, it gives me a new opening to project strong earnings for 2019. 2018 was a year when interestingly cash exceeded the performance of all other asset classes. That has actually only happened four times in modern history.  

CiCi and Ava on Christmas morning

It is very rare indeed that both bonds and equities would fall in the same year, but 2018 was that year. Interestingly though, when you have that unusual circumstance of cash outperforming other market indexes, it bodes well for strong performance the following year. In fact, average performance in the 12 months that follow cash exceeding all other asset classes have averaged a total return of 15.7%. Even more interesting, there is a 75.9% frequency of those gains actually happening. It does not mean that the market will be 15.7% better in 2019 than it was in 2018, but it does mean that gains we should have realized in 2018 will rollover and be fully transparent in 2019. That is exactly what I predict going forward.

I generally do not like to bog down these postings with lots of numbers that make the readers’ eyes glaze over. However, it is important to understand the fundamentals of investing, something in which the machines have no interest. The major component of valuating whether prices are reasonable is the multiple of current earnings. At the current time, the Dow Jones Industrial Average is selling at a multiple of 13.6 based on 2019 earnings. The Standard and Poor’s index of 500 stocks is trading at 14.5 based on 2019 predicted earnings. Both of those multiples are significantly below the multiples realized over many years of investing.

If you read all of the projections of the eminent disaster that were reflected in the financial news over the last quarter, you would assume that earnings for 2019 would be falling off a cliff. In fact, earnings are actually projected to increase next year, defying those projections that are so often wrong. At the current time, earnings for 2018 are projected to finish out at 156.97 for the S&P 500. Projected earnings for 2019 are currently at 172.10. Simple arithmetic indicates that the Standard and Poor’s corporation is projecting earnings to increase 9.6% in 2019. Certainly, if anyone was forecasting a recession or any type of downturn in the economy, it would be unlikely that this growth in earnings would be realized.

A more normal multiple of earnings over the last 75 years is somewhere between 17 and 18. If you assume the halfway point between those two numbers, which is 17.5 times projected earnings of 172.10, you would be looking at a year-end projection next year of 3,011. If you take the difference between that number and the closing of the S&P 500 on December 31, 2018 at 2,507, you see that the market has the potential to go up 504 points during 2019, simple arithmetic indicates that is a return of 20%. Maybe that is high, but still higher.

Now, is it realistic that the market could go up 20% in 2019? Arithmetic is a set answer, but obviously none of us know what the machines are thinking. If it does go up 20% as projected, I think the more realistic answer would be that this is a two-year return, not a one-year return. Since the machines forced 2018 into a negative year, the rollover of that gain that we should have realized in 2018, along with the gain in 2019, might very well reflect this type of 20% gain in 2019.

Painting of Ava by Stevie Streck, one of our talented clients

Currently, there is a lot being said currently about the worldwide downturn in the economies. Certainly, China is realizing a downturn due to the issues regarding tariffs and internal political issues. If you look at the rest of the world, much has actually improved over the last several years. It has been several years since the emerging markets have been a positive influence for performance. For 2019, I see these emerging market countries will get on firmer economic ground and their stock market performance should improve. I do not see a recession for Europe in 2019, and clearly, China is just at a slowdown and not a recession. If, as I anticipate, the tariff issue is resolved in the first half of 2019 and China uses its economic power to stimulate their own economy, you could see a major upcoming turnaround in Asia. I am very optimistic about the U.S. economy, and in my way of thinking, the world economy will be dragged by the U.S. kicking and screaming. So, I see the 2019 year being extremely profitable in the U.S. and it also looks like the international community could follow. Strictly on a valuation basis, the international markets are cheaper in the United States but as was reflected in 2018, the U.S. financial markets outperform the world markets by a significant percentage.

The most dangerous market in the world might very well be what an average investor might consider the safest. The U.S. Treasury bond market is considered by most to be the safest investment that you could make. Although it is absolutely true that you will get your money back, it is not necessarily true that you can make money on the investment. The most important bond issued by the Federal Reserve is the 10-year Treasury note. On December 31st, that rate closed at 2.686 %, which was one of the lowest rates of the year. Interestingly, as recent as October, the same bond traded at 3.248%, and therefore suffered a significant decline during this 90-day cycle. That type of decline in the benchmark 10-year Treasury is unusual and should be analyzed.

As mentioned above, the machines were heavy sellers during the fourth quarter of 2018. The typical trade would be to sell out of equities and move into Treasury bonds. You saw this occurring during the entire fourth quarter of 2018 when the equity markets moved down and the yield on the 10-year Treasury also moved down. When you have a large demand to buy the bonds, as we had in the fourth quarter, you see the rates move down accordingly. 

What is unusual about this movement of the 10-year Treasury is that the Federal Reserve has actively moved up the federal funds rate throughout 2018 and has indicated a desire to move up twice in 2019. So, the short-term Treasury fund rate is moving up to the mid 2.25% level, when the 10-year Treasury is only yielding 2.686 %. Much has been said this quarter regarding the inverted bond-yield, but my assessment is that this 10-year Treasury is unreasonably low and is likely to move higher. There is no question that the move down in the price of oil has positively impacted inflation for 2019, but in my opinion the price of oil is only temporarily depressed. Therefore, if the 10-year Treasury begins to move higher as I project, many investors relying upon this level of financial security will see heavy losses. I also see that happening in the high-yield bond market, which is vastly overextended, and in other types of investments that rely on interest rates, such as utilities and real estate funds. I am thinking that in 2019 there is a high likelihood of a reversal of rates that would impact all of these asset classes negatively.

You do not have to be a Philadelphia lawyer to realize what occurred in the fourth quarter. A substantial sum of money moved out of equities and into bonds during this quarter. If I am correct and these trades were based upon the quantitative analysis of the machines, the trade is very likely to reverse in 2019 if the market moves higher. It is only common sense that if machines trade on momentum to the downside (as they did in the fourth quarter), there is a high likelihood that the machines will trade to the upside if this movement occurs. In order to exploit that move, they will clearly have to sell bonds to buy equities. While it appears to me that the equity markets are underpriced, I fear the Treasury market might be the real upcoming loser.

From my son, I received the latest book written by John McCain, The Restless Wave, which was written right before his death. I have never been a huge fan of John McCain, and I certainly do not agree with all of his politics, but parts of his book were very interesting. He described in detail the problems in the 2008 election when he ran for President of the United States and the mistakes that were made. It is pretty interesting to hear his reflection on what we on the outside perceived as being total chaos. He also went into detail regarding his sickness, which ultimately led to his death last year.  

The only reason I mention this book is that there is a section on immigration that is worthy of your reading. It is a mystery to me why politicians cannot get this very important subject under control. I recognize the fact that the Democratic Party would prefer that we have open borders, not for any reason that makes sense to me other than it is assumed that such a minority would vote Democratic, and therefore it would be beneficial to their political goals. On the other hand, Republicans are just as obstinate on the subject, refusing to accept the fact that many of the illegal aliens that are living in this country have been here for at least a decade and are hardworking, taxpaying citizens. It is hard to believe that the two parties cannot reconcile these opposite opinions, so we continue to have total chaos on the border where the laws are uniformly ignored and the politics make matters worse.  

For those of you who do not recall history, one of the staunchest Republicans of all time issued a blanket amnesty in 1986. Ronald Reagan realized that it would be impossible to deal with immigration issues since many of the undocumented immigrants had been living in the United States for many years. Even though he supported tough immigration laws, he realized that dealing with the people that were already residing in the United States could only be dealt with where they would register and become citizens based upon several criteria. At that time, it was believed that there were 4 million illegal immigrants living in the United States and roughly 3.2 million of those applied for immigration with various levels of success.  

Today, it is believed that there are 11 to 12 million unregistered immigrants in the United States at the current time. The problem since 1986 is that the enforcement of immigration has basically been a joke. There are certain administrations that have practically ignored the laws, and then there are certain cities that allow for sanctuaries for illegal immigrants, even though they are clearly in this country unlawfully.  

Regardless of how you feel about the matter, at some point, we have to deal with the issue. I thought John McCain had a very reasonable explanation that might actually work. Essentially, it allowed undocumented workers that had already been here for 10 years, that had not committed any crimes, to apply for citizenship, pay back taxes, and basically to get right. There was also a very interesting part about a temporary work permit. Basically, this work permit would allow for a three-year trial period whereas they could work in the United States and be accounted for, but would have to return after three years. I am not exactly sure why this plan did not pass in Congress, but it certainly seems to be a reasonable approach to the immigration issue in America today.

One of the most annoying aspects of immigration to me is that we really do not even attempt to deal with the issue. We all know that there are millions of undocumented workers in America that are hardworking, taxpaying citizens. Of those millions, the number that are criminals and against the American public is a small percentage. It would not be that difficult of a matter to close the borders to future immigration, but dealing with the people that live here would be a monumental feat. What is more baffling than all of that is the inability for Congress to even have a basic discussion on the topic. If you get a chance, read these few chapters on immigration and see if you agree with the policy that is laid out. I am sure the hardliners would say no amnesty under any circumstances and the liberals would offer blanket amnesty. Obviously, the answer is somewhere in between and must be addressed from a system that is fair, yet can administratively be dealt with.  

Despite being a steadfast conservative, even Ronald Reagan realized that a compromise to solve the issue was required. Designing of the immigration amnesty was revolutionary in its concept and application. At least Ronald Reagan had the good sense to compromise on the matter. However, enforcement of the laws is worthless if we do not stop illegal immigration.  

There will always be illegal immigration in this country, as there has been since the beginning of time. It is good, it makes us better and certainly the laws exist that would allow it. What we cannot deal with is open borders where anyone can enter the United States at will, without authorization. Maybe the bill that John McCain proposed would actually accomplish that goal.

I am very optimistic for 2019 – not based on what I expect the machines to do, but rather on the fundamentals. You cannot invest based on the wild fluctuations that the machines bring us. Over time, fundamentals always win, and currently, the fundamentals are quite excellent. While we certainly have no way of knowing what will happen when the machines start to do their thing, as was evident in 2018, we do know that eventually fundamentals will outperform all other types of valuation of future stock prices.

As always, 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

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