Thursday, May 12, 2022

Although I am from Tennessee and don’t know how to line dance, I do know there are a lot of things the media is not telling you.

From the Desk of Joe Rollins

I took a break from writing the commentary that I normally write on a monthly basis. Tax season this year was extraordinarily hard and demanding. It seems every time that Congress decides to change the tax law and make it easier, our workload doubles. All the Covid-19 tax changes were designed to help taxpayers, but they put an undue burden on tax preparers. Tax returns have become so complex that it is virtually impossible to explain all the variations that come into play based on the simplification by Congress. Anyone who really thinks they can do their own tax return if it even has a minor degree of complexity is fooling themself. It takes vast computer capabilities to assess all the possibilities that are available. One of the things we know for sure is that if Congress continues to simplify the law, it will provide permanent long-term employment for CPA’s everywhere.
Howdy! Artist Stevie Streck's rendition of
Ava horseback riding

At the end of 2021, the S&P 500 Index had made 87% over the three previous years. These were three of the most outstanding total return years ever for this index. The same cannot be said for the first four months of the 2022 tax year. Basically, nothing positive can be said regarding the performance of those stocks and alternative investments. Even the bond index is down close to double digits year-to-date, and the selloff and volatility of the market is virtually breathtaking. I would have a high level of concern for the short-term future of the markets if I were not well versed on the actual economy and corporate earnings. A couple of things I would like to point out in this posting are the inconsistencies of what you hear on financial news and what are really the facts. You can make up all the extraordinarily screaming headlines regarding your opinions on equities and bonds, but I would rather focus on the actual numbers.

It pains me to even report the first four months results, but everyone needs to understand them. The Standard and Poor’s 500 Index is down 12.9% through the month of April 30, 2022. The one-year performance on this index is 0.2%. The NASDAQ Composite leads the charge down at -21% for the year 2022 and a one-year performance of -11.1%. The Dow Jones Industrial Average is down 8.7% for the year 2022 and down 0.8% for the one-year period then ended. If you thought you were going to get any type of relief investing in bonds the Bloomberg Barclays Aggregate Bond Index is down 9.4% for the year 2022 and down 8.6% for the one-year period then ended.
The future is looking pretty bright!
Congrats Marti and Mitch!
Mia Musciano-Howard's children

After reading those numbers, I guess you could form your own level of pessimism and turn negative on investing in financial assets. If you were to do so, it would certainly be a mistake. If you look at even a five-year time period including the one reported above, the S&P 500 Index is up annually 13.7%. The NASDAQ Composite with its lowly returns in 2022 is up 16.4% per year over the last five years. The Dow Jones Industrial Average’s up 12% for the last five years even though it is showing a negative one-year return. Once again, the Bloomberg Barclays Aggregate Bond Index is showing a lowly return of 1.2% for the five-year period and a significantly negative 2022. If you evaluate all the above information, you will unquestionably see bond investing is by far the least profitable of all the major market indexes.

I get the question almost every day from clients about what is really going on in Wall Street. It is not easy to explain when the economy is extraordinarily good, earnings are great and interest rates continue to be low. Why has the market suffered such severe losses over such a short period of time? There can only be one explanation that makes sense. The hedge funds and momentum traders have figured out that Chairman Powell and the Federal Reserve really have no clue what they are doing. They are so absolutely convinced that the Federal Reserve is going to increase interest rates to the point of throwing the country into recession and creating huge economic losses due to the recession.
Caroline anxiously awaiting her
First Holy Communion!

When Chairman Powell announced that they were increasing interest rates by only 50 basis points, the Stock Market rallied up to close to 1,000 points. By only increasing interest rates by one-half percent, he took off the table that he would increase rates any faster. The very next day the market dropped over 1,000 points because the traders and the momentum machines decided that Chairman Powell was not aggressive enough to kill inflation. Which way do you really want it? Do you want a Federal Reserve that goes slowly and sees how the price increases affects the economy, or do you want to see the Federal Reserve slam on the brakes and shut the economy down to recession immediately? The hedge funds, professional traders and momentum machines are in the camp of the latter rather than the former. Those are not investors!

I had a client ask me the other day why this period was not like 2008 when the S&P 500 Index lost 38.5%. It is fairly obvious that either the client was not alive during 2008 or had not bothered to read the history of the financial markets during that time. If you compare 2008 to 2022, the results could not be more different. The unemployment rate in 2008 was 7.3%, in 2009 it was 9.9% and in 2010 it was 9.3%. The GDP in the fourth quarter, 2008 was down over 8%. We are talking about severe unemployment and a severe drop in GDP due to the financial crisis in 2008.

If you compare that with where we are in 2022, you can see the contrast. Unemployment remains at 3.6% which is virtually the lowest unemployment we have had ever in the history of U.S. finance other than in times of war. As of this writing there are job openings in the United States of 11,549,000 jobs. As of today, there are 5.94 million unemployed. You do not have to be a rocket scientist to figure out there are two jobs for every person unemployed in America. Anyone who wants a job can get a job and have their choice of jobs. In 2008, companies were closing daily, and tens of thousands of people were becoming unemployed immediately. We all recall banks closing, companies going out of business and financial crisis everywhere. Why is it that anyone would compare 2008 with 2022 that actually had the facts? How are the hedge funds, traders and machines trying to convince you that is exactly the case, even though the evidence is overwhelmingly something completely different?

Even though the traders and hedge funds would like you to believe that the country is leading to economic recession in 2022, there is very little evidence to support those outlandish claims. It is true the GDP was down roughly 1% in the first quarter of 2022, but remember that came after the year 2021 where the GDP was up 5.7%. Also, the first quarter GDP proclamation does not include inventory adjustments and I am willing to bet that as the adjusted GDP turns positive in the first quarter of 2022. Few people realize how much affect that weather has on the GDP. If the states up north cannot construct due to adverse weather conditions the GDP will suffer. Obviously, that is not the case beginning April 1st. When the entire U.S. is back to work.
The Schultz Family looking sharp!

But if you are really in the camp that the U.S. will go into recession in 2022 then you must be calling the U.S. Federal Reserve a bunch of liars. The projection for the GDP growth by the Federal Reserve in 2022 is 3.7%, which is a long way from recession. Even their projection for 2022 is a GDP growth of 2.3%. As you can see over the next 18 or so months, our Federal Reserve is not forecasting any recession as compared to the market makers that would like you to believe so.

What also is perplexing to people not truly understanding the movements of the market, is to believe that because the market is down so dramatically that there must be something emphatically wrong with the economy. If there is something wrong with the economy, then there certainly must be a reduction of corporate earnings coming up.

The evidence is in that for the first quarter of 2022, 80% of the reporting companies of the S&P 500 have exceeded their estimated earnings projections. Profits in the first quarter of 2022 are ahead 8.2% of the profits in the first quarter of 2021. The so-called experts have forecast an increase of 6.4% but earnings have far exceeded that, increasing to 8.2%. If there really is not a fall-off in the economy and not a fall-off in earnings, where does all the pessimism come from? Maybe there are just too many geopolitical events going on that have people totally confused. Yes, we have a war in Ukraine, yes, we have inflation, and China is still being extreme about COVID. All of those are certainly things that make you worried. However negative sentiment is not what drives stock prices higher. Stock prices are driven higher by the economy, earnings, and interest rates, not how negative you feel about the world in general.

It is really hard to believe why so many people misunderstand basic concepts of economics. Maybe after about 50 years of studying it, it seems simpler to me than to most. During the year 2021 we had 5.7% GDP growth - quite frankly that is too fast. We overstimulated the economy due to COVID-19 and we ended the year of 2021 with everyone having too much money to spend and too few places to spend it. As a practical matter we needed to slow the economy. Almost every day you read some sort of outrage regarding supply chain shortages. We cannot build enough cars, semi-conductors, produce enough oil or gas, we are basically just short on everything. While the newspapers would like for you to believe that this was a supply chain problem, in fact it was a demand problem rather than a supply problem. There was way too much demand for the available supply. How do you solve that problem? You slow the economy!
Ava enjoying the fact she's almost as
tall as Carter and coming for Josh

The way to slow the economy is relatively simple in monetary terms. If you increase interest rates, you crowd out the marginal borrower. Some people cannot afford homes because the interest rates have gone up, some people cannot afford cars because the interest rates have gone up and the combination of the two slows the marginal consumer and brings down GDP to a more sustainable level of three to four percent. As I mentioned earlier, the Federal Reserve projects that GDP for 2022 will be 3.7%, almost perfectly in the mid-cycle of the optimal GDP rates.

There is no question that we have inflation in the system, but every sign I see indicates that it has peaked and has started to fall. The current administration in Washington desires to have higher gasoline rates by its obnoxious and uninformed restriction of supply of crude oil. They got what they wanted, and prices have jumped up since the price of oil affects virtually every commodity. However, that price has stalled and at a higher price, more and more exportation is occurring. As we go forward into 2022, the fact that the price of oil has leveled out will reduce the cost of inflation going forward.

We also have just an avalanche of bad information either through the lack of knowledge or through the purpose to deceive. It really aggravates me when I read such blatant misstating of facts. Do you not find it interesting that the best performing sector in the market is of course the oil companies? As you would expect since the price of oil has basically doubled due to the President’s decrease in supply, the oil companies have recorded a record turnaround in stock prices. However, to think that they are the most profitable companies around borders on absurdity.

The most famous of these is ExxonMobil that showed profits in 2021 of an outstanding $23 billion. For the first quarter of 2022, ExxonMobil’s profits were $5.4 billion, once again, quite extraordinary. To put it in the upper echelon of performing companies, compare that fossil fuel company to a company that only makes gadgets. Apple had profits in 2021 of $94 billion, which is approximately four times the profits of ExxonMobil. During the first quarter of 2022, Apple had profits of $25 billion as compared to ExxonMobil’s $5.4 billion. As you can see, Apple far outpaces the profits of ExxonMobil. During the first four months of 2022, Exxon’s stock increased to 25% and Apple’s went down 18%. Duh!
Where in the world did CiCi go?

Much was said back when President Trump decreased tax rates and how the revenue to the U.S. government would crash and burn creating huge and greater deficits. But actually look at the numbers, which I think are quite interesting. In the year 2017, which was the first full year of the Trump Presidency, tax revenues to the Federal Government was $1.76 trillion. In 2021, the amount of tax revenue was $2.04 trillion. As you can see revenue from individual income taxes was actually up and not down due to the tax decreases. The biggest complaint by the minority party at that time was that corporate taxes would be dramatically reduced due to these lower tax rates. In 2017 corporations paid $330.1 billion in taxes and in 2022 $371.8 billion in taxes. Once again, common thinking led to the wrong conclusions. As the current administration desires to increase taxes across the board for both individuals and for corporations, I guess they have not checked the above facts which irrevocably proves that decreasing taxes actually increases revenue.

While I am not a particularly big fan of Netflix, I do like to get the facts right. The Netflix stock is down 71% from its all-time high. On the day they reported their first quarter earnings, the stock dropped an unbelievable 43% in one day. It is hard to fathom that a stock as broadly based as Netflix can basically nosedive based on their earnings, but have you actually looked at those earnings? For the first quarter of 2022, Netflix had a net profit of approximately $1.6 billion. Did you realize that this is close to the highest earnings ever in the history of Netflix, but yet the stock dropped 43% in one day? I wonder who has actually tried to deceive you by misreporting the facts. I guess great earnings do not drive stocks higher.

The newspapers screamed that Amazon showed its’ first quarterly loss in over seven years. “What is wrong with Amazon that they cannot make a profit any longer?”, exclaimed the four-inch headlines in the Wall Street Journal. If you looked at the actual earnings report, you saw a completely different story. The profit from operations for Amazon for the first quarter of 2022 showed a profit of $3.6 billion. Pretty good by anybody’s standard. However, Amazon does own a significant interest in the startup electrical car manufacturer Rivian. In this quarterly report, they wrote down the investment in Rivian by $7.6 billion. Therefore, it is true that Amazon showed a loss of $3.8 billion for the quarter, but it was strictly smoke and mirrors. A book entry does not have the same effect as the loss of operations, which is a loss of cash. Those that reported a loss of operations in the financial press did you a disservice.
Always has time for her Dad...

I am not trying to convince you of anything regarding the stock market other than the facts. The economy is nothing like what occurred in 2008 and there is almost zero chance of recession in 2022. Once again, the professional traders are playing you for the village idiot. Let’s see if we can scare the public out of these stocks so that we can buy them cheaper. If you are a long-term investor, you should cheer downturns like this. You can buy companies that will revolutionize our future at bargain basement prices. Why is it that every major professional money manager that manages growth mutual funds is down 25% or 30% this year? The simple reason is that growth is so out of favor that the traders are trying to hide you from the truth. All of that will change soon.

One of the interesting things that is going on at the current time is that the major companies are buying back their stock at record levels. Due to the enormous profits of the major companies, they cheer a downturn in the stocks so that they can buy it back cheaper. When you see buyback programs from $30 to $100 billion per year, you know that this is the truth. Also, we are going into a period where major stock splits will occur and such desirable companies such as Google and Amazon will be selling at a fraction of their current prices. While stock splits do not make companies more valuable, they do make them more available. You will see a mass buying spree in the stocks due to the availability of a lower share price.
Waited a long 26 years for this...
The last time the Braves won was 1995

As I guess you can gather from reading above, while the sell-off is concerning, it is less concerning to me because I know economic support for the stocks is everywhere. The economy will not fall through this year or next. The Federal Reserve will not do something stupid and throw the country in recession. Have you even considered that this year is an election year? The Federal Reserve’s intervention in interest rates to affect the election would be a political nightmare. You can rest assured that the Federal Reserve will stay away from any implication of a desire for either political party.

As I have said often, I still believe 2022 will be an up year just because the economy, earnings and interest rates support a higher close. It may look the opposite from where you are watching, but if you take the time to research the numbers, you will see they are supportive of higher stock prices. I have reviewed the correlation between unemployment and recession all the way back to the first day they started collecting this data. Never in the history of American finance has recession ever occurred with unemployment at 3.6%. How anyone could assert that be the case has clearly never looked at the economic history of the U.S.

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

Best Regards,
Joe Rollins


“All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.”

“This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.”

Saturday, December 11, 2021

“Patience is bitter, but its fruit is sweet.” - Jean-Jacques Rousseau

From the Desk of Joe Rollins

I am starting to feel like the famous former New York Yankee’s catcher, Yogi Berra, when he quipped, “It’s like déjà vu all over again.” The last several weeks of trading have reminded me, once again, of what took place in March of 2020. At that time there was irrational trading based upon rumors, innuendos, and just outright lies. The market would move 1,000 points one way or another based on information regarding the virus. We saw all types of exaggerated trading, but we also learned a valuable lesson during March and April of 2020. I am going to explain all of that in this posting today, so you can hopefully understand it.
Joe and Ava at the Lincoln Memorial
I also want to try to explain why stock prices at these levels are neither irrational nor exuberant. The key component of that valuation relates to long-term interest rates and that offers the explanation. In addition, I want to give you my feelings related to my recent trip to Washington, D.C. I have not been there for a few years, but this reminded me so much of the many things in government that turns off Americans.

I also want to better explain some of the implied hidden tricks in the “Build Back Better Act” which has recently passed the House, but not the Senate. A better title for this would be the “Build Back Broke Act.” I hope to explain some of those provisions. There is so much volatility and so much misinformation in the financial news and I want to focus on how good the economy really is as compared to the negative news we all hear on a daily basis.

Lastly, but most importantly, I want to explain why it is true today that Americans are back to work. The evidence is incredibly overwhelming, and it is staggering to see the misperceptions as reported in the financial news. Yes, we have many, many problems, but what we now know is that we thought the economy was great in 2019, but this economy today is even better. The Federal Reserve Bank of Atlanta is forecasting 8.6% GDP growth in the 4th quarter. Wow!

Before I cover all those interesting topics, I must give you the scorecard for the financial markets for the month of November. It was honestly quite a good month up until the last two trading days of the month. What we saw was gigantic-sell offs on Good Friday and the last two trading days in November. This was based on the threat of the new Omicron virus that broke out in South Africa. Wild swings in the market during those last few days brought the month of November basically to break-even. Overall, it has been a fabulous investment year!
Alexis Chambers (Rollins Financial Staff) and Evan Bentley at the University of Virginia
The Standard and Poor’s Index of 500 stocks lost 0.7% in the month of November, yet year-to-date is up 23.2%. It is interesting to note that since the low of March 2020, the S&P 500 Index is up almost exactly 80%. During the month of November, the NASDAQ Composite was actually up 0.3% and is up 23.3% for the year 2021. The Dow Jones Industrial Average was down 3.5% during the month of November but is up year-to-date at 14.6% and up 18.5% for the one-year period ended in November.

I always like to give you the Bloomberg Barclays Aggregate Bond Index just for a comparison between bond returns and stock returns. This index actually grew in November at 0.2% but is down 1.5% for the year 2021 and its return for the one-year period ended November 30, 2021, is negative 1/3%. I have been telling you and warning you in these postings for years that bond-investing is almost assuredly going to lose money in the coming years. This has proven to be so true, and it is likely that we see additional losses into 2022.

It seems like every month or so we get a new variation of the virus that for reasons not totally clear to me have a major impact on the stock market. As you recall in 2020, we suffered massive losses during March and April of that year due to the perception of the danger that the virus would bring to the American economy. I told you at the time that the sell-off was ridiculous and you could not even comprehend the value of $3 trillion thrown all at once into the economy by the U.S. government. Fortunately, I was right, and we enjoyed one of the best financial years of all time during 2020. What we learned as a valuable lesson during that time was that only those people who try to trade around major market declines will lose money. If you stay invested and continue to treat your investments correctly, you will be much better off than the people that try to time the market due to perceived financial news. As the title of this posting implies, it is not easy to suffer though market declines, but it is those that do stay invested that enjoy the benefit of higher portfolio values in the future.

During November, we actually had one day where the market reversed over 1,000 points on the news that only one patient had been found at that time in the United States with the new version of the virus, which was first located in California. It is hard to believe that in the middle of the day, market traders can the Dow Industrial Average around 1,000 points over such incredibly trivial news. First off, it was only one case, and this country is significantly better prepared now than it was in March of 2020. The weirdest part of this major sell-off was that the news contained information that was incredibly meaningful. The doctors in South Africa reported that this version of the virus was highly transmittable, but the people that currently had this strain of the virus were having very mild symptoms, and none had been critically ill. We know almost nothing about this new variant of the virus, yet traders took it to their advantage to move the markets in a negative manner.
Dakota and Ava in front of The White House
On Black Friday after Thanksgiving, the markets were down dramatically, but as I told many clients, that move was absolutely meaningless. What you have on a day like the day after Thanksgiving is very low volume and virtually no trading activity. The traders take advantage of this situation by moving the markets dramatically one way or the other. Why anyone would be even remotely concerned about trading activity on a given day with low volume belies the reason behind any type of investment philosophy. We saw incredibly volatile trading action during the month of November and to the start of December. However, none of that was terribly unexpected nor really means anything in the long run. Even with this heightened volatility recently in the market, you should recall that the returns this year have been quite extraordinary. Last year the S&P earned close to 20% and this year the S&P is likely to earn 20% again. Think about the very remote possibility of anyone forecasting a return of over 40% in the time frame when a pandemic was controlling basically the entire world’s economies.

There was also high volatility when the labor reports came out on Friday after the end of November. The market sold off dramatically since the number of new jobs was not in keeping with the forecast. Every time I see a selloff like this, I think that we are focused more on the people that make the projections rather than the numbers themselves. Maybe in this case the projections were wrong, and the numbers were right. Notwithstanding the missed projections, the numbers from the labor department for November were extraordinarily positive. Maybe you didn’t read anything beyond the headlines, but I will give you a few of the facts. In the week preceding the labor report, we got news that the new unemployment claims fell to a 52-year low. Let me repeat that just for emphasis. People filing for unemployment that week was at the lowest level in over 52 years. If nothing else that should tell you dramatically the direction of the labor market.

Did you read anywhere in this November labor report that there were 1.1 million new jobs created? Also, for the first time in a long time, the labor force actually grew by close to 600,000 people. I have written many times in these postings that as soon as we got rid of the government subsidies to the unemployed, people would get off their couches and actually go back to work. This month we are seeing 600,000 people now seeking jobs that were not seeking them previously. In addition, the unemployment percentage fell from 4.6% to 4.2%. We are now approaching unemployment levels that comparable to pre-Covid employment.
Dorothy's Ruby Slippers from The Wizard of Oz at the Smithsonian National Museum of Natural History
It is believed by economists that each employed person directly or indirectly supports six additional Americans. This report may include the people in their households, but also includes the employees of the stores they frequent. Indirectly they support the shopkeepers and those employees of the store and other places where they spend their money. Envision those 1.1 million new jobs in one month providing financial support to over 6 million Americans. How anyone can read any of these numbers as a negative, obviously has a political bias that is not represented by the numbers in this report. Look at the year over year numbers and you will see the improvement. One year ago, there were 10.7 million workers in the United States out of work. Today, there are 6.8 million. That is a 36% improvement, year over year. What is even more interesting today is that there are almost 11 million posted job openings and there is only 6.8 million unemployed in the United States. As you can tell there is a high likelihood that many of these unemployed will be absorbed in the coming months and improve the economy even more.

Also written in the report but not emphasized on the financial news is that average hourly earnings rose 4.8% year over year. That is an incredible increase on average for the 156 million employed Americans. However, in given sectors of the economy, those wage increases were significantly better. In leisure and hospitality, the increase was 13.7% higher and 8.9% higher for transportation and warehouse. There is a major movement to increase wages throughout the economy and that can only be good news for both the workers and for the economy in general as the workers have more disposable income.

There was even good news regarding inflation during the month of November. When the current President took office, West Texas Crude Oil was trading at around $42. During the month of October that same price was close to $85 a barrel or basically doubled during the period of this current Presidency. As I quoted previously in these postings, when you cut off the supply as this President did, you are going to have a gigantic increase in the price to consumers. Since the price of oil effects virtually everything we buy, you would expect inflation to move up dramatically when you had a 50% increase in oil. I think realizing their mistakes, the current administration went around begging Middle Eastern countries to produce more oil to keep the price down. We can all agree that depending on the Middle East in the case of a commodity we absolutely have to have, would clearly be a danger going into the future.

It was argued by Washington that cutting off the supply of oil would have little effect on inflation. They could not be more wrong. Also, they have argued that the $2 trillion “Build Back Better Act” would not hurt inflation but would in fact help it. For any of you shade tree economists, try to visualize throwing $2 trillion into the economy and not creating inflation. That would be the economic bonanza of all time if it were true. However, both actions by the current administration have dramatically moved up the fear of inflation from investors. Oddly, information is very good for stocks and bad for bonds.

But in November the price of oil actually fell fairly dramatically down to $66 a barrel. It is still up 50% for the year, but no longer up 100% as before. I think it is fairly clear that the swift move-up of inflation during the summer, was as the Chairman described, “transitory.” Even though he has abandoned that term it appears to me that he was actually correct. There will be a move up in pricing, but it will not be a crippling runaway inflation as we saw in the 1970’s.
The Capitol Building from our hotel room
I recently went to Washington, D.C. for a tax seminar, but I decided to arrive a little bit early to do some sightseeing with my family. It has been several years since I have been in Washington, D.C. but the vastness of it is always a little bit staggering. These governmental buildings encompass an entire block and they are huge and overwhelming in their size. I one time had a client seeking an FHA loan for his business. On behalf of that loan, I was asked to go to Washington to the Federal Home Administration to lobby for its approval. As I walked down the halls of this building, not only was the building itself enormous, but in each office at least three desks were jammed in with people busily working. I thought to myself at that time, what on earth could all these people be doing since I rarely ever hear about anything that this governmental agency does. But the overwhelming number of people employed by the government as represented by these office buildings is downright staggering. We all know very well that the private sector could do what these bureaucrats are doing with half the people and with half the cost. But other parts of Washington, D.C. were also interesting.

First it was extraordinarily cold for us from Atlanta to spend much time in Washington D.C. I have not had the pleasure of being in cold weather like this in some time. But the overwhelming presence of an armed guard is a little bit scary. Virtually all the buildings are armed by service members with automatic weapons. We stayed at the hotel where President Reagan was shot in the 1980’s and this massive building was only partially filled. Occupancy was so low that the restaurants were not even open. I do not think that I have ever been in a full-service hotel where they did not have a lunch service somewhere in the building. The number of restaurants that have failed was devastating. Virtually every other store front was a restaurant that had gone out of business. The one thing you notice in Washington proper is that they have no fast-food restaurants and that they have no service stations. I am sure there are many of both in the suburbs but downtown proper there are none. Unfortunately, most of the governmental buildings are not even open yet to the public. Even though we are 18 months after the start of the pandemic it looks like most of Washington has yet to bother to go back to work. It is unfortunate since tourism was obviously a major part of Washington, D.C. but given the mandates of the government very few of those sights are even open.
World War II and Vietnam Veterans Memorial
I actually had an opportunity to read the Build Back Better Act for a client. Obviously, it is 2,000 pages of a great deal of legalese that I am sure no one clearly understands at this time. I would bet that most of the members of Congress voting on this bill have never even bothered to read the voluminous pages making up the detail. There were however a couple provisions I found quite interesting.

One of the provisions was to increase the mandatory credit for electric vehicles in the United States. Basically, it indicated that if you buy an electric car, you will get a credit of $7,500 off your income taxes for purchasing that automobile. That is basically the same law we have today in the U.S. However, what is terribly unusual about this provision is that if you buy an electric car built buy a union shop, you get a credit of $12,500 as compared to a credit for a non-union electric car which is $7,500. Maybe I can give you some perspective on this provision.

This country owes a great gratitude to Elon Musk and his building of Tesla cars. Without him we would probably not have electric cars in the U.S. today. The brilliance that he brought to this technology has allowed other companies to copy his work and make electric cars available to all. However, when they announced the increased credits, astonishingly Elon Musk was not invited. Tesla Motors is a nonunion shop and therefore not supported by the current Washington administration. But you must put in perspective what the President is trying to accomplish. He wants to make sure that unions have preference over any other workers in America. Just for the record, currently in the United States only 10.8% of all workers are covered by union contracts. In 1955, 33.2% of all workers were under union contracts, but today that percentage has dropped dramatically. What is even more astonishing is the number of workers that are covered by union contracts; while 34.5% of public employees are covered only 6.3% of the civilian workforce is covered by union contracts. The actual numbers as of last month are 7.1 million workers in America covered under union contracts in private sectors.
Washington Monument with the moon overhead
So basically, what the bill says is that we favor the 7.1% of workers in America and to the other 92.9% of the workers, we do not care about you going forward. It is hard to believe that any administration would turn their back on the vast majority of workers in America just because they are being supported by the unions for reelection. But it happens.

Also in that particular bill is an astonishing provision that I have not heard virtually anyone comment on. As everyone knows there is roughly $555 billion in this bill for environmental improvement. This is in the form of grants, credits, and deductions for green-energy projects. But it also contains a provision that is lost on most people reading the Act. Basically, it says that any contractor that would like to receive any of these grants or construction contracts must pay, under the definition, “prevailing rates”. What that means is that if you are to work any of these contracts under this provision, you must pay union labor rates on them. Just to give you an example, the prevailing rate for an electrician in middle class Orange County, New York earns a prevailing wage of $47 an hour. That is 70% above the national average for electricians in the United States.

So basically, what this means is that nonunion subcontractors would have to pay prevailing rates to all their employees. Given that these subcontractors are not likely to be able to afford this increase in labor rates, all these jobs will almost assuredly be guaranteed to be worked by union shops. It does not require further explanation to realize that the only reason that the Democrats have favored these union jobs is because the unions have supported them and provided political and financial support to their campaigns. However, what is baffling is how the other 92.9% of the workforce benefits from them receiving this political support.
Elizabeth and DeNay getting into the holiday spirit
In summary for this month, I will not apologize for the volatility. Volatility is part of investing, and you must rely upon the people that have gone through it to weather the storm. This is our 40th year in business and certainly not our first rodeo. However, take assurance that the economy is extraordinarily strong and in fact getting stronger. More and more Americas are going back to work, and this will make the economy even better. Yes, there are problems everywhere, but on average the economy today is better than it was even pre-pandemic.

Workers in the U.S. are now finally going back to work. They are spending the money they saved or the money the government gave them during the shutdown. All of this leads to the conclusion that coming up we will have even higher stock prices as the economy continues to improve and earnings get better. As with any market rally, you will have excess and companies that sell at prices unrealistic to their underlying value. We certainly have that today. However, investing means you invest in the long-term, not the volatility of short-term.

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond. We never left the office during COVID and have been here since day one of the pandemic. If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us. In the meantime, stay healthy and stay invested.

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

Best Regards,
Joe Rollins