Thursday, November 11, 2021

You’re Totally Misreading the Supply Chain and Labor Shortage Statistics - Good News is Everywhere!

From the Desk of Joe Rollins

I watched in amazement as the media distorted financial information based on an uninformed reading of the above statistics. I never really know whether this misinformation is due to the lack of intellect in economic terms or maybe there is a political motivation to their lack of clarity. This month was a really good example of how the media misinterprets information and unfortunately misleads investors.

I told you last month that October was the scariest month of the year for reasons other than Halloween. It is a month of extraordinary volatility and sometimes major corrections. How surprised were we this month to have an extraordinarily profitable month of October in the face of staggering misrepresentations of economic data?
Father + Son - Josh & Joe at the World Series
I really want to cover some subjects that the media is misleading you on and I also want to reflect on the ineptness of Congress and how they are misleading you on current legislation. I want to into words the economic damage that they are trying to force onto the American public. Hopefully you will find this information as interesting as I do. But before I cover all of those interesting topics, I must report on the stock market performance for the month of October. It was quite a remarkable month all around.

The Standard and Poor’s Index of 500 stocks was up nicely at 7% for the month of October and for the year 2021 is up 24%. For the one-year period, that index is up a very satisfying 42.9%. The NASDAQ Composite was up 7.3% during October and year-to-date is up 20.9%. Like the S&P 500, it is up 43% for the one-year period then ended. The Dow Jones Industrial Average was up 5.9% during the month of October and for the year 2021 is up 18.8%. The one-year performance on the Dow Jones Industrial Average is 37.7%.

I always like to compare stock market indexes with the bond index just so you have a reference point to the different asset classes. The Bloomberg Barclays Aggregate Bond Index was absolutely zero for the month of October and for the year 2021 was down 1.7%. The one-year performance on this bond index was -0.4%. As you can tell the major market indexes were at a minimum of 37% for the year while the bond index was a negative. I often think about this bond index when I see the recommended asset classification by other advisors. I saw one this week that was most distressing. An advisor put 70% of a portfolio in bonds for a client that was in their early 50’s. I really do not know whether that allocation to the bond index was due to a lack of intellect or just a misunderstanding of the economic circumstances today. Anyone that would allocate a 70% allocation to a bond index which will almost assuredly lose money over the next year is certainly not doing their clients a service.

Over the last several months there has been constant talk in social media about how ending unemployment benefits was not helping the job market. Basically, these articles were stating that the employment situation in America had not improved after unemployment benefits were stopped in most states. That is absolutely, unequivocally, incorrect yet the article stated otherwise. It just goes to show that nobody fact checks social media and when you classify anything as an opinion, you can rest assured there is some agenda behind that opinion. The evidence is clear that ending extended unemployment in the United States has greatly increased employment. While it seems so intuitive to think that would be the case, many have argued the opposite.
Reid Schultz, Age 6, with his pit crew
The unemployment report for the month of October clearly illustrates this economic reality. This is the first job report that actually included the entire period not covered by the extended unemployment in the United States. The report showed private payrolls jumped 604,000 during the month and the unemployment rate dropped from 4.8% to 4.6%. While that was certainly good news for employment even better news was that for the months of August and September, jobs were increased by 235,000 from the reported totals. They were a lot of reasons why employment was better in October, but undoubtedly the fact that the virus counts have dropped dramatically have certainly helped. Kids going back to school and childcare freed up a lot of people to go back to work that previously were not. But there is no question that cutting off the pandemic unemployment programs including the $300 federal bonus and the 79 weeks of eligibility versus the normal 26 weeks, have forced people off the government payroll and back to private employment. This is very good for America.

We have not yet reached the unemployment rate of 3.6% that we enjoyed prior to the pandemic but clearly, we are headed in the right direction. If you want a sign of how far employment has come, just take unemployment in the city of Atlanta. In September of 2020, the unemployment in the city of Atlanta was 7.3%. For the month of September 2021, the unemployment in the city of Atlanta was 2.6%. It is almost impossible to get unemployment down to zero. There will always be some people that are unwilling to work, regardless of their financial circumstances.

I sat down and I read all the reports regarding the unemployment in October. For the most part, the articles raved about how good the report was, but there was this underlying contentious perception that somehow the numbers were distorted because the participation rate was only 61.6%, which was the lowest level since the 1990’s. Basically, that means that of all the workers that were available to work, only 61.6% either had a job or were looking for a job. At the current time, there still remains 10.4 million posted job openings and the number of unemployed people in America is 50% of that number. There are many reasons why certain people do not go back to work, but why anyone would consider that to be a negative is beyond me.

If American citizens want to stay out of work, for whatever reason, that should not form a negative reflection on the economy. There are many reasons why they do not want to work and why we care makes no difference. I am of the opinion that these people that do not want to participate in employment have their own issues and we as investors should ignore this particular economic reality.
Austin, Dakota, Joe, & Shelley - chilly night, hot win for the Braves
A good example of how the press misinterprets economic data is the current supply chain and labor shortage issues. There is no question that these issues have slowed down production in the United States and have created delays in delivering product. But it is not a negative. You have to realize that the real reason that we are facing these issues is a demand surge unprecedented in the United States. We had a period of 18 months where people were restricted from buying, traveling, and doing things that they want. When the negative vail of the Covid-19 shutdown was released, there was an unprecedented surge to buy. We were seeing it throughout all phases of the economy. And that is a good thing.

There is a shortage of new cars. There is a shortage of used cars. There is a shortage of hotel rooms in resort areas. Americans are buying like “drunk sailors” in every phase of the economy. Resort properties and mountain homes have essentially doubled in value over the last several years. It is reported that Hawaii has virtually no hotel rooms available during the upcoming holiday season. Las Vegas has reported records unprecedented and even larger than the pre-pandemic. Everywhere you look there is a shortage because of the extraordinary post-pandemic demand and available cash.

As I reflect on the things I have written above, maybe you can understand why the media misunderstands this concept. While certainly all of these are problems, they fall into that “high-rent” district problem of a good thing. Americans would not be traveling, buying, and investing if they did not have money. This surge in demand is created by tons and tons of government money forced on American citizens during the pandemic. Since people were restricted in what they could do, travel, and purchase, they just waited until they got the green light. Once they started spending, the supply chain just could not keep up. It is not a negative that all these supply chains are backed up, it is very much a positive. People have money and they are using that money for additional consumer items and pleasure traveling.

While business travel is not back to pre-pandemic levels, leisure travel has exceeded it. I have not been on an airplane in over a year that was not filled to capacity. Unfortunately, I travel a lot and the airports are overwhelmed with people going somewhere to their liking. This huge demand by definition would slow down the supply lines, but is not a permanent problem. Logistic experts tell us that the price of ocean freight has gone up 10 times pre-pandemic prices. Once again, a positive outcome for excess demand exceeding supply. There will be a day in the next year or so where supply chains will catch up and prices will fall. The reason I do not fear major long-term inflation is I see already prices moderating in real estate and in automobiles. Once the supply chain catches up with demand, prices will moderate, and inflation will not be a major concern.

Ava & Randy Wittman relaxing at the Rollins Beach House
Recently one of my clients sent me a video regarding the governmental debate over the new stimulus bills. It was a simple video that got me thinking about exactly what is going on in Washington these days. Basically, the video said that if you counted from one to a million and each second was another number it would take you 12 days to get to one million. While I did not try that myself, it certainly seemed reasonable. The video went on to say that if you did the same counting to one billion it would take you a cool 31 years to get to that number. It gave the impression that most people believe that one trillion is 100 billion. In fact, one trillion is 1,000 billion, not 100 billion. To count from zero to one trillion it would take you 31,688 years. There are not many readers of this posting that will live so long.

Put this perspective to what we are witnessing in Washington at the current time. There is no question that the country needs the roads, bridges and airports fixed and that would be money well spent by the U.S. government. The other bill debated in Congress is less clear that it is even wanted or needed. But make no misunderstanding exactly what is going on here. In my opinion, it is not a matter of satisfying the needs of the American people; it is more likely an attempt by the progressive party to do long-term damage the American economy to meet their political goals of weakening America against the rest of the world.

Believe me, I am not a conspiracist, but I do know numbers and I do understand them. Take for example Senator Bernie Sanders, age 80, who has indicated that rather than $3 trillion, this social spending bill should be $6 trillion. Just for comedic effect, the number of years it would take to count to 6 trillion is 190,000 years. But the reason that Bernie Sanders wants to spend $6 trillion has nothing to do with the programs in the bill. It has more to do with weakening the American economy for generations to come. He will not be alive that long, but it will be his legacy. To spend $6 trillion, basically the U.S. government would have to print new currency for the full amount. The long-term effect will be devastating.

DeNay flashing Braves signs at the game
If you understand economics, you understand that printing more currency creates inflation, creates debt, and creates long-term negative economic effects. While certainly spending that much money over a short period of time would make the economy better over the short-term, the long-term effects would be devastating to the future U.S. citizens. There is no justification for that type of spending where it clearly would all be deficit spending. I have looked at the provisions that they represent would raise the money necessary to fund a bill such as this, and it is an illusion that has no economic backing. Hopefully more informed politicians would put a stop to this silly provision and allow the U.S. economy to grow on its own without governmental backing.

One-time President Obama said, “Elections have consequences,” and the new presidential election certainly had consequences. I will not focus on the politics; I will just focus on the economics. If on the first day of office you shut down a major pipeline to deliver oil to the United States and you cut off all new permits in Alaska and in the Gulf of Mexico, you have reduced the supply of oil. What is the economic effect when you reduce supply in an economy where the demand is going higher? The basic answer is that you have shortages.

The price of oil during the writing of this posting has gone up 70% in 2021. Could anyone be surprised that it went up when you restrict supply? It would have been very easy to phase in each of those changes over a two- or three-year period, but rather the decision was made to do it immediately rather than with common sense. While certainly the people that desire more protection for the environment were elated, they clearly did not think of the unintended consequences of shortages and the price of oil.

Since oil is a major component of virtually all pricing, you can fully expect to see almost everything go up in price based on the price of oil. Whatever you call this, it is a tax on the American citizens. This tax more heavily weighs against the poor people and the people that must commute to maintain a job. If you increase the cost of commuting to these U.S. citizens, you have lowered their standard of living just like an additional tax would do.

Ava, The Little Sure Shot of Buckhead
All around the world we are seeing governments make stupid decisions based on environmental concerns. All of us should have environmental concerns, but we should do so with informed data and not by making rash decisions such as we have made in the United States regarding fossil fuels. The examples are overwhelming, and their consequences are downright scary.

Europe is a prime example of many environmental concerns gone awry. While France produces almost all their electricity with nuclear power, Germany has banned nuclear power in that country. Given that they do not have nuclear power plants in Germany, they are running dangerously short on energy and most of their heating is generated with natural gas. The main source of natural gas for Germany is the pipeline coming out of Russia and is controlled by the Russian government. Now if that does not scare you, nothing will. In a time of war what would Germany do?

Although a serious topic, you had to be somewhat amused that recently the President asked the Middle East to produce more oil for the United States to keep the prices down. Basically, the amusing part of this analogy is that we cut off your own supply and production in the United States and the price of oil went up. So now, once again, we are asking countries that are not particularly friendly to the United States to help us out of the energy crisis. Since it takes about 20 years to build a nuclear power plant in the U.S., we are backing ourselves into a corner since we can no longer use coal. Think about it for a second. If we restrict the production of oil and natural gas in the United States and coal is restricted, how are we to produce energy for the future? While solar energy and wind generated energy are nice, at the current time they do not even contribute a rounding error to the needs of energy in the U.S.

It is interesting to see all the car manufacturers reporting that they will be converting to electric cars in the future. Elon Musk made a great point the other day that we should consider. He indicated that if the majority of cars in the United States were converted to electric, we would need five times as much electricity than is being produced in the U.S. at the current time. Just exactly how can we get to those numbers with a restriction on fossil fuels and coal? The only alternative would be nuclear and currently there are no new nuclear plants being planned in the United States. While understanding environmental concerns, this is an area where common sense needs to prevail.

There was much handwringing in the financial media when the GDP was announced for the 3rd quarter at 2%. This was a major move down from the 2nd quarter of 2021 when the GDP was announced at 6.7%. While some of the financial press was sending out an alarm over this sharp reduction, it is quite obvious that they do not understand enough about economics to even form an opinion. While it is true that the GDP fell dramatically, the 2% number is a more realistic reflection of where GDP should be rather than the 6.7% in the 2nd quarter. In the first half of 2021 we had the government passing out money to virtually anyone who asked for it whether they needed it or not. As we now know, much of that money was fraud and siphoned off from the United States by foreign criminals. Whatever the reason, much of this money went into the economy and created excess GDP.

It is always scary when GDP gets that high, since you know the major concern of the Federal Reserve is to control inflation. As inflation goes up, surely higher interest rates will follow. Fortunately, since the GDP took a major step down, it gave the Federal Reserve an opportunity to sit back and wait on higher interest rates. It now looks like there will be no interest rate increases until the end of 2022. Stable interest rates are the most powerful force that leads stock markets higher. It looks like, at the current time, interest rates should be stable and low for another year.

If you believe the 3rd quarter GDP at 2% was correct and that the economy has slowed to an exceptional level, you would be incorrect. We are seeing the economy strengthening all around us before our eyes. Currently the Federal Reserve Bank of Atlanta is forecasting GDP growth in the 4th quarter to be up 8.5%. While the forecast of the Atlanta Federal Reserve has been fairly close in prior quarters if they are correct on this estimate, that would be a huge increase going from 2% in one quarter up to 8.5% in the very next. As mentioned above, one of the reasons why you are seeing such shortages throughout the economy is due to excess demand due to people holding on to excess cash. The reason why you see the stock market going higher is because much of this cash is being deployed in investable assets making all time new highs by the indexes. It only makes sense that people accumulated money over the last 18 months are now free to move around and spend it, creating higher GDP. That is exactly what is driving the markets higher.

I have often written that the major component to higher stock prices is higher earnings. When you see higher earnings then you can justify premium prices for stocks. Of the first 100 companies reporting in the Standard and Poor’s Index 0f 500 stocks this quarter, 84% of them had beat earnings expectations. You are seeing earnings growth throughout the economy in virtually every sector. Bank earnings this quarter were nothing short of spectacular. All of the bad loans that the banks anticipated happening during the pandemic never came to fruition. In fact, loan losses by banks are at one of the lowest levels ever. What we are seeing is corporate earnings exploding to the upside due to U.S. demand, which has been funded by governmental money. Whatever the reason, earnings have been so spectacular it has led to higher and higher stock prices.

Joe & Ava enjoying daddy-daughter time with the Braves
Almost daily I am confronted by someone pointing out the inconsistency of higher stock prices as compared to historic averages. They will explain to me that stocks are selling at 27 times forward earnings when historically have been more in the 16 times forward earnings range. Their statistics are not incorrect, but looking in the rearview mirror gives you no perspective of the economy we are in today. One of my go-to comments in these circumstances is show me a time when corporate earnings could be compared to a time when interest rates were virtually zero. It has never happened.

If you go back and look at the average of interest rates when 16 times earnings were reasonable, you will find the Federal Funds Rate at 4% to 5%. Interest rates have never been so low for so long. Yes, you can argue that stock prices are disproportionally high, but that is not the case if you base it on interest rates. Since we know that bonds will likely produce negative returns and cash is paying virtually nothing, the only game in town is stocks. And we are also seeing a huge demand to purchase stocks by the general public given the excess cash they have accumulated during the pandemic.

The Infrastructure Bill will now pass and that is another $1 trillion in government money that will flow to the private sector. Interest rates we know will stay stable or lower for the next year. We also know that corporate America is running at full capacity in every aspect. Hotels are full, airlines are full, manufacturing is robust, and construction is out of control. Everywhere you look around you there are shortages, but not because of an inability to produce but rather due to excess demand over supply. All of that even tells a shade tree economist earnings will be spectacular in 2022. I full expect to see new highs on all of the indexes for at least the next 12 months. As we get closer to the end of the year, I will give you my forecast on 2022, but already the performance of the indexes on 2021 have exceeded the expectations.

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

Thursday, October 7, 2021

Get Ready For the Best Time of the Year to Buy Stocks!

There is no way to sugarcoat the fact that the month of September was a real stinker for the stock market.  Even though there was no fundamental reason why the market went down, I guess the weight of seven straight “up” months finally meant the traders needed to reestablish their dominance.  But it has still been a great year for investing so far and I certainly anticipate that it will be for the rest of 2021.  

There were so many “reasons” why the market went down in September that I need to address a few of the main culprits. We had the infamous Evergrande collapse in China which, for some reason, put some level of fear in U.S. investors in the market.  And as occurs every couple of years and means nothing, we had the debt crisis of extending the Federal borrowing limit.  We also endured the typical textbook move of traders selling tech due to a small increase in interest rates.  This argument is so full of holes, it is laughable that they even continue to quote it.

I have a lot of other things I want to talk about in this posting; the effect that potential Estate tax changes will have on you as investor, the current crisis in energy and how it was self-created, the incredible job the government did in 2020 to bring the country out of recession in comparison to the 2008 recession, and many other topics I hope you will find of interest. 

C-A-R-O-L-I-N-E Schultz, Age 7,
 ready for the big game

Before I get into those truly interesting subjects, I must discuss the very negative month of September.   The Standard & Poor’s Index of 500 stocks ended down 4.7% for the month of September but is still up a very satisfying 15.9% for the year 2021 and up 30% for the one-year period ended September 30th.  The Dow Jones Industrial Average was also down 4.2% during September but is up 12.1% for the year 2021 and is up a very satisfying 24.1% for the one-year then ended.  The NASDAQ Composite was down 5.3% for the month of September but is up 12.7% for the year 2021 and is up 30.3% for the one-year period then ended.  So even with the huge loss that we lived through during the month of September, the year-to-date numbers are all double digits and continue to be outstanding.  I fully expect that we will add positively to these numbers as the year progresses.  

The Bloomberg Barclays Aggregate Bond Index was also down 0.8% for the month of September.  If you thought being in bonds during a market sell-off was a good idea, you would have found it was not.  The bond index is down 1.7% for the year 2021 and for the one-year period it is down 0.9%, as compared to the double digits increase in the equity indexes.  It was somewhat surprising for the month of September that bonds actually got crushed as much as they did.  Not only were taxable bonds down, but the muni-bond market took a big hit during the month.  While it is true interest rates increased marginally during the month, this overreaction seems to be based on fear rather than economics. 

I guess the biggest event during the month was the potential failure of the Evergrande company, which is a huge real estate developer in China and was at the point of total default during the month.  There was a lot of handwringing here in the United States thinking that the failure of Evergrande would be the equivalent to the bankruptcy of Lehman Brothers in 2008.  Apparently, the analysts that drew that comparison did not live through the 2008 debacle, as I did, as certainly this was nothing compared to 2008.  

If you read the history of Evergrande, you will see how it got into trouble.  The Chinese government believes that to keep their citizens happy, they must keep them working.  It had been reported that China built entire cities with no one to move in just so the workers could stay busy.  While Evergrande is a semi-public company, it is heavily influenced by the Chinese government.  You have to wonder if all of these empty projects built by Evergrande were their own doing or at the insistence of the Communist government.  

As the day of the default came around, there was huge selling on the U.S. market for reasons not clear to me.  I can only assume that the traders thought that they could build up enough volatility and fear in investors that they would force them out of their positions so that they could buy into them cheap.  What was not reported was that the day after, Evergrande sold an interest in its banking subsidiary to the Chinese Communist government.  Surprise, surprise, the Chinese government injected $1.5 billion into the company to keep it from defaulting.  The most likely outcome of the Evergrande debacle, will be that the government will end up buying the company (or forcing another company to buy it), as it does with so many other companies on the verge of failure in China.  In my opinion, there is no way the Chinese government is going to put this many workers building real estate out of work.  

It appears that the Chinese Communist government is really scrambling now to reduce the positive aspects of capitalism on their economy.  They are proposing, in my opinion, restrictions that could not possibly be enforced.  One of the new ones that is fairly interesting is that Chinese children are not allowed to play video games during the week and then only three hours on Saturday and Sunday.  Good luck trying to enforce that one.  Interestingly, some of the most successful companies in China are video game providers.  

La Vie en Rose! Ava and Dakota 
on a beautiful day in Paris

Another one that came out during the month was that China will outlaw all crypto currencies, making it illegal to both buy them and even hold them.  This has more to do with the ability of crypto to be untraced and money moving out of China to a more stable economy like the United States.  There is no question that the Chinese government is scrambling to try to reduce the strength of the capitalist in China, which is pretty easy to do as the government can basically just step in and take over your company.  As you know, virtually all companies in China are owned partly by the Chinese government and, therefore, they will do as told.  

Another interesting aspect of China right now is that they are suffering a huge power shortage.  A great deal of the manufacturing in China has been restricted since there is not enough power to run the factories.  In Europe there is a huge shortage of natural gas.  The price of natural gas over the last several months has gone up four-fold and natural gas providers in Europe are failing daily.  Going into the cold winter months, all of Europe is concerned about having enough natural gas to heat their homes.  Most of the natural gas in Europe comes from a pipeline from Russia and they’re also a huge importer of natural gas from, of all places, the United States.  Even in the United States, the price of gas has gone up from $2 per thousand cubic feet to well-over $6 per thousand cubic feet, just in the last couple of months – the highest rate in over a decade.  Do you have any idea why the world is suffering an energy crisis? 

Economics 101 is pretty simple.  If you reduce the supply, then prices will increase.  Given equal demand, but less supply, unquestionably the price will go up in any economy.  The very first act of the new President was to put a stop to the Keystone Pipeline out of Canada, not over time, but that day.  Keystone is now suing the U.S. government for an excess of $10 billion for stopping this pipeline.  Also, the current Administration stopped all drilling in Alaska and would not issue any additional permits for drilling in the Gulf of Mexico.  Coupled with the hurricane season which took offline a lot of drilling capacity in the Gulf of Mexico, we have a supply constraint.  

Did anyone really believe that if you change the supply overnight, you wouldn’t have an increase in price?  Not only have we seen a dramatic increase in the price of gas and oil in the United States, but it is also clear that the entire world is suffering from a shortage of natural resources from the United States.  Do you realize that China is the largest importer of coal out of the United States?  China has such terrible problems with air quality because their principal source of energy is coal.  If you restrict coal and natural gas and you also prevent additional drilling for oil, you are going to have shortages around the world and the prices are going to go up.  We worked for five decades to divorce the U.S. from Middle Eastern oil.  Overnight we are now totally dependent on them again.  

Reid Schultz celebrating his
 6th birthday with friends Rex & Rattles

During the month, there was a lot of handwringing over the extension of the Federal government’s debt limit so that the government would not face a shutdown.  I am absolutely bewildered by the fact that people are concerned about this subject.  It happens every couple of years and is a major negotiating point for whichever party is not currently in the majority.  But the whole argument is almost silly considering the alternative.  Does anyone really think that there is a chance, even remotely, that they will not extend the debt?  If they didn’t extend the debt, what would be the repercussions?  Will they quit spending money – no way!

The U.S. government would shut down and our Defense Department would disband.  And more importantly, all the “pork barrel” programs that Congress has created would come to an end.  So, like so many times in the past, the financial press creates this frenzy regarding extending the debt, but they always do.  It almost amuses me to watch these speeches in Congress where basically the many members of Congress pronounce that the world will come to an end without the extension of the debt and how they hate each other for bringing up this subject.  Then at the very last second, they extend the debt at 11:00 pm on the night it expires, and they all sit around the campfire singing “Kumbaya,” while patting themselves on the back for cooperating and putting the country in deeper debt.  The new current extension of the debt is only for three months so we will suffer through this again in December, but you may rest assured, it is not an economic problem since they always extend it.  There is no reason for the market to go down.  

It is also hard to believe that our elected officials know so little about economics.  If you took the time to watch the questioning of Federal Reserve Chairman Jerome Powell and Secretary of Treasury Janet Yellen by Congress last week, you could see the economic wasteland that is in Congress.  Honestly, some of the questions were so ill-informed, I was embarrassed for them.  If you recall, former Federal Reserve Chairman Alan Greenspan used to make up flowery language to answer Congress without an answer.  I felt the same way this time with Powell and Yellen.  Some of the questions were so na├»ve as to not even merit a response, but trying to respect Congress, they gave articulate answers to inarticulate questions.  

Josh, many moons ago, finding fame 
on the Jumbotron at Turner Field

For reasons I am not totally clear on, the financial press continues to assert that October is the worst month of the year for the stock market.  The evidence absolutely does not support that assumption.  September, which has now passed, is by any definition the worst month of the year.  The only thing that can be said about October that has been proven by history is that it is by far the most volatile month of the year.  Yes, there have been many selloffs in October, but there have also been huge rallies.  Looking at this October, I expect volatility will continue.  However, I think we have a positive trend as earnings are starting to be reported in mid-October.  

It is hard to believe, but the projection now for increasing earnings for the third quarter of 2021 over the third quarter of 2020 is a projected increase of 27.6%.  It is true that it is comparing current earnings with a prior COVID quarter but if you look back into 2020 you will notice by the third quarter of 2020 the economy had already recovered.  Interest rates, while somewhat higher during September, were by historic standards extraordinarily low and the economy continues to expand at a more comfortable level.  

There is no question that the economy has slowed down from the second quarter.  At that time, we were running a GDP greater than 6%.  It is now believed that the GDP for the third quarter may be half that or 3%.  But it is extraordinarily important that we understand that we cannot run the economy too hot without creating higher interest rates, inflation, and other negative aspects.  A 3% economy is much better than a 6% economy where we would have capacity overloads and shortages in almost every industry.  Therefore, the trifecta of components leading to higher stocks are now in place and after the sell-off in September, we should see higher prices for the rest of the year.  Assuming no major economic event, of course.  

Ava chopping it up on the Jumbotron
 at Truist Park – Go Braves!

 I often wonder why investors do not see what I see when it comes to major market selloffs.  If a major selloff occurs during a negative economy, everybody understands that you need to protect your portfolio against further declines.  But when you have a major selloff for no particular reason, investors really should not do anything.  As you saw in the last week of trading of September every day was down huge, but then up huge when October rolled around.  It is so absolutely clear that the traders were forcing the market down and after the end of the month they covered the shorts so that their month-end balance sheets would not be distorted.  

I looked at the listing of over 125 mutual funds run by Fidelity Investments.  During the month of September, less than 10 were actually higher. This includes not only U.S. stocks but also international securities, bonds, and other types of investment products.  When you see that virtually every mutual fund was down, you must realize that this was not a natural move by investors.  So, when you get these types of selloffs that occur, which are principally concentrated by the hedge funds and the traders, your best investment advice is to do nothing.  As is often the case during selloffs, your best strategy is typically to look the other direction.  

It still surprises me that the U.S. government has not received better marks for its response to the 2020 pandemic.  I follow the trend of COVID very closely.  The vast majority of the states are trending down in number of new cases.  Although the death rate has remained stubbornly high, most of these deaths are people with preexisting conditions and the unvaccinated.  Even Dr. Scott Gottlieb, former head of the FDA, has projected that by Thanksgiving of this year the country will be back to normal due to the combination of the vaccinated (including children) and the people that have some immunity from previously having the virus which will significantly reduce the spread.  The economy continues at full speed ahead notwithstanding the virus.  

Marti and Mitch Musciano-Howard,  Age 17, 
 looking “TWO-rrific” for 
Homecoming 2021

The 2008 recession should be a close approximation to 2020.  If you recall in 2008, we had a major credit problem where companies were going out of business daily.  Even though the government came along and bailed out the banks and stabilized the economy they did nothing for the out-of-work employees.  In fact, it took three years for the economy to come back from its pre-2008 downfall.  

However, in 2020, due to the governments intensive funding of individuals and businesses, the recovery was almost overnight.  What we found was that the recession in retrospect only lasted roughly 90 days and already today the GDP is at pre-pandemic levels, although why employment is not where it needs to be seems to be a mystery to all economists.  Currently as of today there are 10.5 million job openings posted in the United States and there are only 8.5 million unemployed.  You have to think that shortly the unemployed will run out of resources and have to actually go back to work.

What is also interesting is that during 2020, which was a so-called recession year, the number of people living in poverty in the United States fell from 10.5% in 2019 to 9.1% during 2020.  How ironic is it that the actual number of people in poverty would fall during a recession year?  All these positive aspects are attributable to the Federal Government jumping in and bailing out the economy.

There is no question that the negative is that the amount of debt, as compared to the GDP, has soared.  Prior to the pandemic the Federal debt was 79% of the GDP.  It is now 98% of the GDP and the current Congress is spending at a rate that is unprecedented.  I am not exactly sure which economy Congress sees, but it is certainly does not need the $3.5 trillion injection of funds which would benefit some but make the amount of Federal Debt soar.  If you believe that the bill would be fully funded by additional taxes, then you don’t understand how the government works.  

One of the new provisions of the bill going through Congress is that it will reduce the amount of estate tax from a threshold of roughly $11.7 million per person to roughly $5.7 million per person.  If this bill were to pass in its current form, a lot more people would be covered under the estate tax than are currently.  In the United States there were only 1,900 Estate tax returns for the entire year of 2020 that were filed and owed estate tax.  As you can see, estate tax was almost nonexistent for most Americans.  However, if you reduce the exemption amount to the $5.7 million threshold a great many Americans will be affected.

Mia and family catching
 a Braves night game 

One of the financial concepts that I have always advocated for is that you gift to your children and others during your lifetime rather than at your death.  Did you realize that you could give $75,000 per child into a 529 account without gift tax and without it being included in your estate?  However, almost no one elects to do so.  

If you elect to make a transfer today, all the appreciation of those assets go to the second generation and avoid estate tax.  Yet so many people and certainly so many investors that I know refuse to make lifetime gifts.  I was meeting with a lady the other day on this subject.  She was in her 80’s and concerned about long-term care and her future.  Even though she had $8.6 million she was unwilling to gift any of it to her children who were struggling economically.  I finally asked her what exactly her concern was in making these transfers.  Her voice shrilled when she stated in uncertain terms that it was her money, and she may need it one day.  Given the fact that this lady was very frugal and long-term care while expensive is not exorbitant, the possibility of her needing all this money during the rest of her lifetime was strictly remote.  However, even with all my persuasive conversation with her she remained unwilling.   

I would like to briefly explain why traders believe that when interest rates go up you sell tech.  The origin of that axiom goes back to when tech companies had to borrow substantial sums of money to finance their operations.  However, large tech companies now hold more cash than probably any other industry by far.  If you look at the balance sheets of Apple, Google, and Microsoft you will note that they have cash balances well in excess of a hundred billion.  The thought that any of them would be required to borrow money is almost laughable.  It is true that all of them have some debt on their balance sheet, but mainly because the debt is U.S. based and the assets are foreign.  

Marti and Mitch reassuring Mia 
with their best, 
"We promise we’ll behave” looks

Anyway, I hope the traders did not scare you out of your positions these last couple of weeks when they were busy selling tech under the false pretense that tech goes down when interest rates go up. The most profitable companies in the world are tech and everything in our lives is controlled by them.  You can go around the world and see Microsoft Windows in every country.  Any increase in interest rates will have no impact on the financial results of these huge companies.  What is even more interesting, as the end of September came by interest rates actually fell.  So basically, a small increase in interest rates during the month of September may have led to the uncomfortable selloff this past month.  

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

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