Wednesday, August 26, 2009

Federal Express, UPS or USPS?

From the Desk of Joe Rollins

You might think that the above title is unusual, but over the last week I have become somewhat introspective about the healthcare reform debate, and it’s made me wonder which of the above companies I would want to manage my healthcare plan. They’re all in the exact same business, right? Would I want the private sector, represented by Federal Express and UPS, to manage my healthcare? Or the bumbling, incompetent and completely bureaucratic disaster that is the United States Postal Service? As I’m sure you’ve guessed, it didn’t take me very long to come to my decision.

I know I’ve said it before, but I want to point out to you just how incompetent our government is at doing virtually everything in comparison to the private sector. I’m going to give you a few thoughts to ponder regarding the public healthcare option that the Obama Administration is trying to force through Congress at the current time.

But before I get into that discussion, I want to reflect on the current U.S. financial markets, which have been nothing short of stunning for the last five months. The S&P 500 Index is now up 15.6% for the year. Remember that we endured a disastrous year during 2008 when the S&P lost 37%, so the gains for 2009 are even more remarkable when you think about where we were a year ago.

Looking back at the last five and a half months, on March 9, 2009, the S&P was at 660. This past Friday, the S&P closed the day at 1,026 for a stunning gain of 55% in the intervening months. Even more impressive is that the NASDAQ Composite closed Friday at 2,021. This represents a stunning increase of 60% over the past five and a half months. Although we hear nothing but gloom and the doom from the financial media, I’m hard-pressed to think of a time when the financial markets have rallied so impressively at such a fast pace.

While it is true that the economy is less than stirring at the current time, the financial markets typically do not reflect the current economic situation. Rather, the financial markets forecast the future, and it is now absolutely clear that the U.S. economy is on the mend. I believe it’s almost a given that the 3rd quarter of 2009 will reflect positive GDP growth, which is months prior to when it is forecasted that the economy will turn.

Many developed countries have now reported positive GDP growth for the 2nd quarter of 2009 even though the U.S. continued to have negative GDP growth. For example, Japan, Germany and France all reported positive GDP growth this past week. Asian countries never reflected a negative GDP growth during this time and countries such as China and India have continued to reflect strong, positive GDP growth.

Even with all the serious unemployment the U.S. is trying to overcome, the economy reflects that it’s on the mend. Again, the financial markets are not reflecting the circumstances of today; rather, they are reflecting the realities of tomorrow. As the economy continues to improve, the financial markets will reflect even higher profits and stock prices.

I am often baffled by investors who refuse to invest because of the economic turmoil they see occurring at the current time. Current economics has nothing to do with stock market investing. If you have waited the last five and a half months to invest due to the influence the financial media has had on your opinion of the U.S. economy, then you have missed a great wealth building opportunity. Regardless, I still don’t think it’s too late for you to invest. As I always say, you shouldn’t invest for today or tomorrow; rather, the point it to invest for 10 plus years from now.

You may rest assured that the financial markets as we know them today will sell at many times the current level 10 years into the future. Why some investors focus on the performance of the day, week or month has always been a mystery to me. Investors who sell out during bad times often never make the decision to reinvest, but as the last sell-off has demonstrated, they still would’ve been better off remaining invested than to have not been invested at all.

Now, on to my current soapbox rant… It’s amazing that certain members of our U.S. Congress are arguing that it’s only possible for the government to bring the economy out of recession. The incompetence of our government is so legendary I can’t even imagine turning over 30% of the U.S. economy for them to manage – this is what the healthcare reform plan would represent.

It has been proven that if you return money to the taxpayers, they will use it to improve the economy. The “Cash for Clunkers” program has been operational for only a few months, but it has already pumped $3 billion dollars back into the economy. Furthermore, it increased production capacity for the automobile manufacturers, creating jobs for Americans. Additionally, it took nearly 700,000 “junk” cars off the road and put Americans in newer, safer and more fuel efficient cars. This is the type of tax incentive that creates commerce and pulls the economy out of recession. It is not government that created these jobs; it is government returning the money back to the taxpayers who paid it to them in the first place.

Even so, this highly successful program has run into some major problems, mostly because of the ineffective way it is being run by the government. Even though the dealers advance the money to car buyers promised by the government for their clunkers, the government has been slow to reimburse the dealers for their advances. This failure on the government’s part has put many dealers in financial strife.

As of today, almost $3 billion has been committed in clunker rebates. However, the government has only reimbursed dealerships $147 million of that $3 billion – roughly 7% of the total extended by dealerships. This is just another example of the gross incompetence the government exercises when it attempts to operate in a free enterprise. Do you really want these people to manage your healthcare program?

Driving to work the other morning, I noticed a great deal of construction on Peachtree Street. There were two crews digging along the side of the road, one of which had a crew member in a hole with a shovel while five other guys stood around and intently watched him work. This certainly doesn’t seem like the most efficient way to dig a hole to me! The second crew was a little more efficient; they only had four guys drinking coffee and blocking traffic on Peachtree Street as commuters tried to make their way into work.

Last year, the City of Atlanta’s budget ran a deficit of $64 million because they did not understand the difference between capital improvements and operating costs. Duh?!? When Shirley Franklin was first elected, she assured us a more efficient Atlanta government. According to the Atlanta Journal-Constitution, the city of Atlanta has 20% more employees now than when Mayor Franklin entered office. This is just another example of how government continues to get bigger and bigger while growing more inefficient than ever. We will never control the size of the government until taxpayers stand up for less government, less taxes, and fewer items sponsored by the government.

Remember my previous comments about the stoplight situation on Peachtree Street? Is it surprising to you that the City of Atlanta does not have a synchronized traffic light system? Nearly every developed city in the world has a synchronized traffic light system, but the City of Atlanta doesn’t, and I can only assume that’s because of its incompetence. It is not a matter of money – they have plenty of money to waste – it is a matter of competence. All City of Atlanta taxpayers need to reflect on what value they are getting for their taxes. While everyone in the world complains about Atlanta traffic, our local government has proven to be completely inept at making any improvements.

I also find it very interesting that the U.S. government is sponsoring a plan to loan up to $10 billion to Brazil to fund deep water drilling for new oil discoveries off the shore of Rio de Janeiro. It is quite likely that China will actually get the opportunity rather than the U.S. because they are offering more money and better terms. Additionally, China is funding deep water drilling off of Cuba in order to guarantee future oil deliveries since they have a shortage in natural resources.

What I find interesting about this development is that the U.S. government will not even fund drilling in the United States, but they are willing to fund drilling in Brazil. What is wrong with this picture? Even though we all agree that the shift to more favorable energy sources is desirable, it is a pipe dream to believe that in 15 or 20 years we will be off fossil fuels entirely. Now that China has essentially locked in supplies from Brazil and Cuba, where will the United States get its oil? It seems that everyone in Washington is focused on fulfilling dreams at the jeopardy of the realities that will ensue over the following decades.

Late in the afternoon this past Friday, the White House announced that the 10-year projected deficit has been increased by $2 trillion. Perhaps they’ve found it helpful to announce such terrible news late on a Friday afternoon in the dog days of summer. Even with all the complaints regarding George W. Bush’s deficits in the last years of his administration, the deficits projected over the next decade make George Bush’s deficits look like rounding errors. Is this really the direction that Americans wants their Federal government to take?

One of the more interesting controversies in the current debate regarding healthcare reform is Congress’ continued assertion that medical insurance companies are not competitive. The reason that medical insurance companies are not competitive is principally because of government itself. Each state sanctions which medical insurance providers can operate in their state while restricting competition. If insurance companies could sell across state lines and if there were some universally accepted standards that medical insurance providers would have to abide by, then competition would be enormous.

There is no shortage of medical insurance providers. But with government intervention, competition is not allowed to flourish. If the government would provide the benchmarks and then allow the insurance companies to compete across state lines, there would be ample competition to bring down the cost of medical insurance premiums. Regrettably, I don’t ever envision a situation where our current Congress would ever want to get their fingers off the control button of healthcare, which is a large portion of the American economy.

I could not help but be amused by Paul Krugman’s opinion piece in Friday’s issue of The New York Times. I often mention Paul Krugman in these posts. He is an economist that supports socialized government. He was also one of the largest supporters of Barack Obama when he was running for president. Unfortunately, he has been wrong very often about many things and now he has lost total credibility in my mind. After all, it was he who said it was necessary for all the banks in America to be nationalized in order to survive. He was so very wrong on that point.

In Friday’s opinion piece, Obama's Trust Problem - The New York Times, Krugman griped that the Obama Administration is not liberal enough. His argument is that only government can properly provide healthcare. However, since the Obama Administration has seemingly abandoned the socialistic goals Krugman advocates and is willing to consider something other than a complete nationalization of the health plan, Krugman has become very critical of Obama. It appears that the Left is turning against the President they so badly wanted in office.

I have gotten in the habit of reading Paul Krugman’s articles faithfully just to see how wrong he can be. In one of his pieces last week, he claimed that the Federal government is what saved us from economic disaster, stating, “What saved us? The answer, basically, is big government. We appear to have averted the worst: catastrophe no longer seems likely and big government, run by people who understand its virtues, is the reason why.” I’d like to ask Paul Krugman a question similar to the one Congressman Barney Frank posed to a nut job at a town hall meeting last week – “What planet are you from??”

CNNMoney recently reported that only $120 billion of the $720 billion of the infamous stimulus funds has actually been spent. The total spending for the stimulus bill to date is less than 1% of the GDP. It doesn’t make sense for Krugman to assert that such a small expenditure by the Federal government could have turned around an economy that lost 6% of GDP in the 4th quarter of 2008 to turn into a positive GDP growth in the 3rd quarter of 2009. The question all taxpayers should really ask is, if the stimulus money spent thus far has only produced a 1% positive GDP growth and the economy turned around without it, why not forego spending the rest of the money that’s been appropriated?

Since we are facing the most staggering deficits ever in the history of the United States, maybe returning the unspent $600 billion left in the stimulus bill could help this matter. If taxpayers do not get involved in cutting the spending of Congress, we will truly face deficits of monumental proportions.

I wish financial commentators would at least check their facts before they make statements that are not supported by reality. Paul Krugman’s assumption is that only countries with big governments can have economies that prosper and have better welfare for their people, and that only the government can control banks and properly provide healthcare to its people. This has been the socialist versus capitalist argument since the beginning of time, where socialists believe that only the government knows what you need and only the government can furnish it. However, capitalism has been incredibly successful in the United States, and in my humble opinion, the government is not the reason for its success.

You may be asking what the facts are for why capitalism works better than socialism. If you look at the countries with the largest government spending, you will see that they have suffered through the worst recession over the last year. For example, Sweden, which spends 52.6% of its GDP on government items, had a negative GDP growth of 6.2% over the last four quarters. Italy spends 48.5% of its GDP on government and has had a negative GDP growth of 6% during the same timeframe. The United Kingdom, which spends 41.8%, has suffered through a negative GDP growth of 5.6% over the last year. The United States spends 36.6% of its GDP on government, and has suffered a negative 3.9% economic decline. From these numbers, it seems to me that big government does not guarantee a good economy.

So, what countries spend the least on government and what is their corresponding GDP growth? China spends only 30% of their GDP growth on government, and they’ve enjoyed a 7.9% GDP growth in the last year. India spends the least on government at 20.4% of GDP and their growth has been 5.8% over the last year. How can Paul Krugman make such an argument when it is clearly not supported by the facts?

I don’t want you to think I feel negatively about our economic and financial futures; Americans seem to be rising up to fight big government, and I am optimistic that taxpayers see what is going on in Washington and will stop it cold in its tracks. Deficits cannot continue to grow exponentially over the next decade and still allow the country to prosper. The only way to avoid economic disaster is to remove our current Congress and elect officials that are responsive to America’s needs, not some fantasies that they’ve created in their own minds that are not supported by economic reality.

As Congress returns in September to debate the healthcare reform matter, just consider some of the items that I’ve mentioned in this posting. Our government is ill-equipped to do anything well except administer our defense program. Every other facet of government should be privatized and returned back to basic capitalism. While everyone wants healthcare reform and it’s obviously something that’s desperately needed by all, the last thing we need is a government-controlled healthcare system. It will surely create a boondoggle of gigantic deficits that we will never be able to overcome along with an inept medical care program. Again, this is the basic argument of capitalism versus socialism. I vote for capitalism.

As always, the foregoing comments are my opinions, thoughts and personal biases. In all cases, I could be wrong.

Thursday, August 13, 2009

Please – Divorce Your Children Now!!

From the Desk of Joe Rollins

The following post was originally published in my old quarterly newsletter, The Rollins Report, in 2006. Almost every week, a client tells me about the horrors they are facing after putting their children through an expensive college. Most of the time, the graduate finds no viable employment opportunities available to them. I directed this article at parents who are financing their children’s education on their dime without providing any direction to their children on the focus of their education. Of course, the title of this post is cynical, but I do hope you’ll read my suggestions and try to follow some of the guidelines I recommend.

When I graduated from college, the last thing I wanted to do was move back home to live with my parents. More importantly, I’m certain my father would never have allowed that to happen. This wasn’t due to finances; it had more to do with it being time for me to move on to the second phase of my life.

Almost every week, I have discussions with parents who’ve allowed their children to move back in to their homes after graduating from college, where they can basically come and go as they please. These children often obtain menial jobs, but spend every dime of their earnings without contributing at all to the household expenses. Worse than all of that, many times the children have no incentive for establishing their own livelihood, and therefore, they are perfectly comfortable having Mom and Dad pay all of the expenses associated with their living arrangements. If you are in that particular situation, I think it’s wise for you to ask yourself if you think you’re doing your child a favor or a disservice. By agreeing to subsidize their lifestyle, parents are not preparing their children for the reality of dealing with their own financial obligations in the real world.

One of the more controversial topics that I discuss with clients pertains to financing their children’s college educations. It is a standard in the financial planning industry that parents should never incur any form of debt to provide for a child’s education unless they have first completely provided for their own retirement. The theory is relatively simple – a child has a lifetime to pay off any debts they incur in obtaining a college education, but parents only have a short period of time to pay off those debts, and doing so becomes more difficult in retirement years.

The financial planning industry standard is that unless you have already saved 100% of your own retirement, then your children should borrow money (or get a part-time job) to provide for their own college education; the parents should not be financially responsible. I know that this statement is controversial and that many of my readers will disagree with this concept, but I personally believe that the theory is correct and that parents should not incur any debt to finance their children’s college educations if they have not provided for their own retirement.

Another item that has created a lot of controversy with my clients is my opinion on allowing a child to dictate which college they will attend (on their parents’ dime, of course). I believe you have an obligation to your children to point them in the direction of obtaining a quality education, but it should not come at a cost that will break the bank or risk your retirement. Many high schools today are directing children to very expensive private liberal arts colleges that only provide a general higher education. In almost every case, these schools are very expensive compared to public institutions.

There is absolutely nothing wrong with directing your children to attend an affordable, quality public college that is close to home. I find it amusing when clients tell me that their children are demanding to attend an out of state institution (usually somewhere in Colorado for some reason).
While Colorado has excellent colleges, their curriculum is often just as good (and sometimes worse) than schools in Georgia. Therefore, the money spent to go to some colleges is certainly not warranted by the credibility you would get from a degree from one of those institutions.

In one particular case, when I questioned why a client’s child wanted to attend a college in Colorado, I was told it was because he liked to ski. I couldn’t help but point out that it would be much cheaper to send their son to the University of Georgia and fly him to Colorado every weekend to satisfy his skiing appetite. Besides that, he would probably get a better education and be closer to home.

The other comment I hear from too many parents is that their children just want to get away from home. If you live in Marietta and your child goes to Georgia Tech and lives on campus (only 15 miles away), that is plenty of distance for a child to feel all the freedom they need. It is imperative for parents to discuss with their children that it’s more important to obtain a quality education than it is to attend an expensive institution. If parents or children have to borrow significant sums of money to finance a child’s education, then they are doing themselves and their children a disservice.

Along the same lines, I am often amazed by parents who set up accounts for their children without ever discussing the importance of saving and budgeting with them. This only leads to trouble down the road for the child (and of course, you).

Another great tragedy in America today is that all college kids are given credit cards upon arrival at campus. They are allowed to use these credit cards however they wish and they typically wind up incurring a ridiculous amount of debt before graduating. For example, I recently visited a college town and ate at a typical hamburger joint for dinner. I was sitting by a group of 15 students eating hamburgers and drinking sodas. I noted that every single student paid for their individual tab with a credit card. While credit cards are certainly convenient, I do wonder whether their parents ever discussed the dangers of getting into credit card debt with them. Have you?

I don’t think it’s inappropriate for parents to discuss with their children the money that they’ve set aside for them. While it can be discussed at the time the parents decide to give the funds to their children (if they are still alive at that time), I recommend that it be done before then. I have seen too many children inherit large sums of money without any type of direction from their parents as to how to spend it or invest it, nor have they ever been advised on the manner in which it is intended to be used.

Another gripe I have about parents and college education is that children often major in subjects that are completely irrelevant to obtaining a job. While it may be great to be a Latin major or study medieval history, it qualifies a college graduate for virtually nothing. I think it is the parents’ responsibility to emphasize to their children that their degrees need to be in subjects that will allow them to obtain a job that will support the child’s financial needs. How is your child going to support their expensive habits while you are paying for them?

It hardly seems appropriate to me for anyone to incur debt to obtain a college degree when the only thing they are qualified to do is wait tables. This, of course, is fine if the parents are not expected to supplement their child’s income when they cannot pay for their own cost of living. If you allow your children to waste their education on an irrelevant degree, you will spend many years paying for that poor decision.

My intention is not to advise you to abandon your children as soon as they graduate from high school, but the fact of the matter is that you need to save for your own retirement first and then begin a savings plan for your children’s educations. One method for saving for higher education that I highly recommend is that all parents establish a 529 plan when a child is born so that there will be money available to them when they reach college age.

I am certain that all parents reading this blog could afford to put away at least $300 a month for a child’s education. But, I think simply putting money away is not a parents only obligation. The obligation extends to you counseling your children about the money, suggesting quality colleges that are nearby and affordable, and encouraging your child to go into fields of study that will allow for a fruitful financial future.

Every time I mention a 529 savings plan to a parent who will soon have college-age children, I get nearly the same excuse. They’ll either say they plan on putting some money aside for their child’s education when they get a bonus or an unexpected amount of cash, or they’ll simple provide for that child’s college education when the time comes. That’s all well and good if you do get a bonus or if you’re able to pay for it when the time actually arrives. It’s amazing, however, how much money can be accumulated in an education account for your child if you only deposit the small $300 amount as indicated above. The magic of compounded interest would allow you to accumulate a significant amount of money during the child’s adolescence.

For example, if you save $300 a month for 18 years and the account only earns a nominal 5%, you would have over $106,000 available for your child when they reach college age. If you started saving a little later and only saved for 15 years before the child reached college age, you would still have in excess of $81,000 accumulated. In the worst case scenario, if you’ve only saved for five years before your child reaches college age, you could still accumulate over $20,000. My point is that it’s never too late to start to save money for your child’s higher education.

As I’m sure you’re aware, Rollins Financial can establish 529 plans, Coverdell Educational IRA’s or custodial accounts for your children to help you begin this important savings process. The absolute best way to provide for these accounts is to have money drafted out of your checking each on a monthly basis and moved directly into the investment account that we would manage on your behalf. I truly cannot imagine that there are very many clients of this firm that cannot afford a program such as this. Furthermore, I honestly doubt that my clients would miss this sum of money on a monthly basis.

Finally (and most importantly), at some point, it is time to cut the apron strings to your children from a financial standpoint. I encourage all parents to establish an age that they believe their children should be financially independent and advise your children accordingly. Then, when your children reach the age that you discussed, they are on their own to succeed or fail. Establish a date, advise your child of that date, then kick them out of the nest when that day arrives.

Parents that continue to support their children for years after they have graduated from college are not benefiting themselves or their children. A child needs to be given a goal to reach, and when the day comes that they have reached their goal, then they need to be turned loose to provide for themselves financially.

Again, I am not recommending that you abandon your child from an emotional standpoint. They need to be emotionally supported by you as long as you are around. However, I believe that financially, there needs to be a day when you take them off your payroll and divorce your children. Review your current situation; could I be addressing you?

Tuesday, August 11, 2009

Adventures on the Left Coast

From the Desk of Joe Rollins

With only one week left before my son, Joshua, returns to school (he’s 14 now, if you can believe it!), I decided to take him on a golfing excursion to some of the more famous golf courses in the Monterey Beach area last week. Today I want to provide you with some of my thoughts stemming from that trip and my personal impressions of the “bad economy” we are all supposedly suffering through. As information, there wasn’t a single empty seat on any of the flights I took during the entire trip. If the airline industry isn’t making money at this point, then it must be an unforced error on their part.

While my son was in golf camp during the week, I took a quick trip to Las Vegas, Nevada to meet with some clients. The week proved to be exhausting, and I was more than ready to come home, especially since I was tired of buying $15 glasses of wine. Whenever I go out of town, I must admit that I always look forward to going home. One of the true pleasures of traveling is to hear the flight attendant announce that, “We are making our final descent into Atlanta, and we will be landing at Hartsfield-Jackson International Airport soon.” Atlanta is my home, and in most cases, I prefer to be here than elsewhere.

As I sit here dictating this post with Bob Marley and the Wailers playing in the background, I cannot help but feel relaxed. I’m sure that’s no surprise to those of you who are familiar with this artist’s work. This feeling of relaxation is intensified by the fact that I also have the TV on – with no sound – and am watching Tiger Woods play in the World Golf Championship. There’s just no way to have a bad day with this combination.

I am posting a few pictures of me and Josh taken on our California trip. One shows Josh hitting off of Pebble Beach’s famous 18th hole, and another shows him on the legendary par 3 at the 7th hole. Both holes are some of the most celebrated in the golf world. I have also posted a picture of Josh and me on the 5th hole green, overlooking the lonely cypress which marks the end of the peninsula on the 6th green. Interestingly, this hole is in the front yard of Charles Schwab’s house; he didn’t invite me in. If you’ve never had a chance to visit Pebble Beach, I can tell you that it’s truly sensory overload.



You may have noticed from the pictures of Josh that he has grown a lot this past year – about 7 inches, to be exact. He stands close to 6’2” – quite a tall 14-year old, wouldn’t you say? There’s no doubt he gets his height from me.


After traveling so much over the past week, I’ve been pondering the exorbitant amounts of money our country wastes on airline security. A few years ago, a deranged potential terrorist tried to light a bomb in his shoe while on board a transatlantic flight from France. Fortunately, he was unsuccessful. Now, over one million people per day have to take off their shoes and walk barefoot through airport security – the world’s greatest breeding ground for athlete’s foot. I find the amount of money that is spent on security incredible, along with the fact that we hold up millions of travelers just because of the acts of one deranged potential terrorist.

On an early morning flight out of Monterey, California, there were four TSA agents and two passengers going through security. The elderly woman in front of me had to go through the screening machine at least 10 times before she was given clearance. It was sad to watch her take off each piece of her jewelry, including numerous bracelets that apparently set off the machines. Quite simply, it appears that airport security has taken on a life of its own and a much better job could be done with a lot less people and better technology. This may have little to do with the financial world, but it is still of interest to those of us who are subjected to this nonsense while traveling.

In addition to typical security hassles, I had my sixth money clip confiscated by security. I always forget that my money clip has a small knife attached to it, but security always catches it. I now order them in bulk only to turn around and contribute them to TSA. At least I get a tax deduction for them.

I played golf twice in Las Vegas, when the temperature was a blazing 110 degrees. It was quite a contrast from Monterey, where the high of the day was 55 degrees. There haven’t been many times in my life where I’ve visited two cities on the same day where the temperature in one city was double that of the other. I’ve often heard that people aren’t as affected by the heat in Las Vegas because of the low humidity. I can assure you that the high temperature in Las Vegas was significantly more comfortable than when I was cutting the roses in my yard this past Saturday. Atlanta’s humidity makes the temperature almost unbearable, and while it’s certainly hot in Las Vegas, it’s not overbearing.

So, what did my trip out West tell me about our current recession? One thing’s for sure – there were no signs of a recession in Las Vegas when I was there last week! The hotel where I stayed was booked and every restaurant had a waiting list to get in. Whether or not they’re taking in as much money on the gaming is hard to tell from walking through the casinos. Believe it or not, I didn’t wager a single dollar while in Las Vegas. I can tell you, however, that the high price of food and everything else in Las Vegas indicate that if there is a recession in the gaming industry, it will soon be over.

It occurred to me that my clients might like it when I’m out of town. Why? Because in the over one-week period that I was out West, the S&P 500 advanced almost 4%. I wouldn’t be surprised if my clients are taking up a collection to send me out of town more frequently. It is rare in the investment world that there could be such a large, positive move over a relatively short period of time.

The S&P 500 has now advanced exactly 50% since it established its low on March 9, 2009. As of Friday, the S&P was up a stunning 13.7% for 2009, which by any standard is a remarkable recovery from the disastrous year we had in 2008 and the first two months of 2009.

Clients often ask me how, if the market is up 13.7% for the year, the market could not have gained 50%. It is simply the axiom of a multiple from a smaller level. For example, if you have $100 invested in the stock market and it goes down to $50, then a move up of 50% brings you to a balance of $75. Clearly, we’re working out of the hole that was created in 2008, but you must admit that the move has been noteworthy. This makes me wonder how many investors are sitting and waiting for the right time to get back in the market – they’ve already missed a significant move up.



Even when I’m out of town I keep abreast of all the financial news by reading the publications on the Internet. Last week brought good financial news along with good returns for our investments. Friday’s announcement of reduced jobless claims was very encouraging. Even more encouraging was a tick-down in the unemployment rate from 9.5% to 9.4%. As I’ve often said in these posts, unemployment will be the last of the major economic indicators to recover, but at least it is moving in the right direction. I, like most economists, expect that the unemployment rate will still grow, so any move down indicates that at least employers are finally putting some people back to work. You cannot have a major recovery in the economy until more people are working and are able to pay their mortgages and buy consumer goods.

It was also very encouraging to see virtually all economists forecast that even the current quarter will very likely show a positive GDP growth. For those who continue to express the dour forecast of a “double-dip Depression,” they must be discouraged by the economists forecasting such positive growth. It appears that the 4th quarter of 2009 will return GDP growth to a more positive number, even though it will certainly be less than what we would consider to be a robust economy.

For those of you who are really interested in how the U.S. economy has recovered so quickly from such dire circumstances, then you must look to the Federal Reserve. The writing on the wall for a recovering economy is when in the 4th quarter of 2008 the Federal Reserve slashed interest rates and freed up the monetary base to put money into the economy. Their swift actions to prevent a prolonged recession have made the turnaround dramatic and sudden. Without the splendid work of Dr. Ben Bernanke and his dramatic moves to inject liquidity into the economy, such a move would not have been possible.

Dr. Bernanke’s term of office will come to an end in January of 2010. There is even some talk in the liberal press that he should be replaced by someone within the Obama Administration. To even hint at replacing a person of Dr. Bernanke’s intellect and abilities borders on outright lunacy. No Federal Reserve Chairman has ever had to face this type of downward turn in the economy and no one has ever so admirably and successfully performed as well as Dr. Bernanke. He should not only be reappointed, he should be congratulated for a job well done.

I am often asked about the wealth effect and how it affects the stock market. I have argued for years that the reduced values in real estate didn’t have as much of an effect as the reduced value of people’s investments. When your house goes down in value, it still offers you the benefit of somewhere for you to live. The fact that your house is down in value does not affect your net worth until you decide to sell your house. I argue that relatively few people are in that situation since they are not forced to sell their homes. The decrease in your home’s value may make you feel poorer, but it doesn’t have a dramatic effect on your daily expenditures.

However, when your investments decrease in value, you not only feel poorer, it also makes you feel like you can’t afford consumer items. As the stock market increases, you will see investors start to skim some of the profits off of their investments and use that to resume purchasing consumer items. This wealth effect of higher investments will give people the confidence once again to travel, buy cars and invest in real estate. This dramatic upward move in the stock market over the last five months will set the foundation for a stronger economy wherein people will once again resume consuming, which will broaden the financial recovery and bring forth a better economy for all Americans.

On Friday of last week, President Obama said his administration’s policies, “rescued our economy from catastrophe while building a new foundation for growth.” Sounds to me like President Obama is taking credit for the recovery. You may recall that in January, the $784 billion dollar stimulus act was passed. As of today, less than 15% of the money has even been spent and 2 million additional jobs have been lost. Yes, a lot of the money has been turned over to the states, but the actual funding of pet projects of Congress has not even begun. One should clearly argue that if the economy is already recovering, why do we need to spend money over the next two years in this gigantic waste of government money. Now would be an appropriate time to basically repeal a significant portion of the stimulus act and try to get the budget deficit under some kind of control.

I couldn’t believe my eyes when I picked up Monday’s edition of The New York Times and read economist Paul Krugman’s opinion that the government needs to approve a second stimulus bill immediately. His argument is that only bigger government can cure the economy. Krugman is the same economist who forecasted that every U.S. bank would be required to be nationalized in order to survive. He also forecasted that we would have a Depression even greater than in the 1930’s with its 25% unemployment rate. It’s even more interesting that Krugman concedes in his commentary that the economy is getting better and that the Federal Reserve and Dr. Bernanke are likely responsible for that positive action. Even his doom and gloom comrade, Dr. Roubini, has spoken of his confidence in Dr. Bernanke and the work he has done during this recession. Given how incredibly inaccurate these economists have been over the last two years, it is hard to take Krugman’s suggestion that a new stimulus package is necessary as being truly serious.

After dissecting 2nd quarter GDP data, economist Casey Mulligan noted on The New York Times blog (which is not exactly the mouthpiece of conservatives) that, “total stimulus at the state and federal levels amounted to only $12 per person.” I think anyone would have a hard time arguing that $12 per person did anything significant to stimulate the economy over the last five months.

The Wall Street Journal had an interesting editorial the other day. The expenditures of the Federal government for next year are close to $4 trillion. The government generates revenue of approximately $2 trillion, and therefore, to close the budget deficit, we would have to raise double of the revenues that the government currently receives. While tax revenues will increase in a better economy, there will never be an economy so good that it will make up such a shortfall. The Wall Street Journal pointed out that you can’t expect higher income taxpayers to make up the deficit. In fact, they pointed out that if you took 100% of the income for all taxpayers making more than $250,000, you couldn’t bridge this budget deficit. Therefore, anyone or any government that tells you otherwise is using governmental trickery.

On President Obama’s Saturday morning radio address, he said, “We must lay a new foundation for future growth and prosperity, and a key pillar of a new foundation is health insurance reform.” Such a phrase could certainly not have been uttered by an economist since it’s so clearly inaccurate. You cannot improve an economy by increasing taxes. In fact, it has been proven on numerous occasions – during the Kennedy, Reagan, and G.W. Bush Administrations – that to improve the economy, you must cut taxes, not raise them. Additionally, in order to fund this socialized medicine program, you would be adding another stumbling block for employers to hire employees. This act will do more to lose jobs in America than any legislation I’ve heard proposed as of yet.

While sitting on airplanes over the past two weeks, I had a lot of time to read a great deal regarding the proposed health care bill. Frankly, a great deal of it is totally unintelligible to the average person. However, after I was through reading virtually all the summaries I can find on the bill, I still cannot see anything in these proposals that will reduce costs and deliver better healthcare services. If President Obama is to be successful in selling this concept to Americans, he needs to emphasize what is in the bill that will make it better than the insurance most Americans are perfectly satisfied with today. All we’ve heard to this point is that very few additional people will be covered, the cost will be higher and the taxes will increase dramatically to provide less care to more people. It just doesn’t seem like this is a good deal, especially if it needs to be forced down the throats of Americans during the middle of a recession.

As amazing as it seems, no one in Congress or the Obama Administration seems to have a solution to the budget deficit. The solution is clearly not on the revenue side, but on the expenditure side. Congress has approved expenditures that will double U.S. government expenditures in only two years. If it’s true that the economy is now on the mend and positive GDP is forecasted for 2010, why on earth would we want to continue to deficit spend? The solution would be to immediately and dramatically reduce government expenditures by only spending what you are required to spend and by avoiding political funding of earmarks which add nothing to the economy and only hurts us in the long run.

We should also never forget that we live in a dangerous world. It didn’t receive very much publicity, but the U.S. military recently confirmed that two Soviet nuclear submarines were observed off the U.S. coast. The importance of a nuclear sub off of the coast of Georgia was downplayed, but it’s important that we not forget that they wouldn’t be there if they didn’t fear for their own wellbeing. In a time where we’ve elected to dramatically cut defensive budgets and spend the money on political earmarks, we should never forget that the potential for military action on our own continent is not impossible as proved by the events of September 11, 2001. There’s a fine line when the government spends money for military needs. Yes, you can sit down and talk with the enemies, but as President Teddy Roosevelt said, “Speak softly and carry a big stick.”

There was also good news last week that one of our unmanned drones shot and killed a Taliban leader and one of his wives in Pakistan. This is a clear example of how technology could control our enemies. Without the loss of one of our troop’s life, a drone flown out of Tampa, Florida was able to shoot and kill one of the most wanted men in the world.

In talking to people in Monterey and on the flights I took last week, it’s clear that the public still fears stock market investing. As has been noted here before, there continues to be an amount in cash on the sidelines equal to the full amount represented by the U.S. financial markets. However, it is quickly dropping. Every day, billions of dollars are being transferred into the bond market or the stock market. It is only a matter of time until a significant portion of this cash is invested.

The future for the financial markets continues to be outstanding. Stock markets increase before the economy. We now have hard evidence that the economy will be better next year than this year. This means that corporate profits will go up and stock prices should reflect that increased profitability. I continue to be amazed that we’ve not seen more inflows of money into investments. Now is the time to participate in that rally. With cash yielding less than one-half to 1% per year, and a market that’s up 50% in the last five months alone, it’s not too late for you to participate in future profitability.

As always, these are my thoughts, opinions and forecasts. It’s perfectly possible that I am wrong.

Sunday, July 26, 2009

Stealth Rally

From the Desk of Joe Rollins

This week proved to be another excellent one for investors. We are now seeing a great deal of investors who are trying to get invested before the market gets too high. I must’ve heard a hundred times in the recent financial news that too many investors have missed this rally, so now people are trying to get on the train before it leaves the station. Many of our clients listened to our suggestions and allowed us to get them comfortably seated on that train as the year has progressed.

For this week alone, each of the major market indices is up about 4%. Given the overwhelmingly negative news provided by the media, who would’ve thought that the major market indices would be up so positively in this week alone? For the year thus far, the Dow Jones Industrial Average is up 5.65%, the NASDAQ Composite is up 24.66%, and the S&P 500 is up 10.02%. If the financial year came to a close right now this would represent excellent returns for 2009, but we still have a little less than half a year to go.

Most of the gains we are enjoying at the current time are not due to the financial results of the companies being all that extraordinary. While it’s true that every major company has beaten their anticipated financial results, it’s also true that for the first time in a long time, companies actually have visibility into the future. However, do not lose sight of the fact that earnings are still dismal as compared to normal earnings in prior years.

I have often written that the stock market did not need for the economy to get better before starting to improve. The stock market is only interested in seeing the economy quit going down before it begins improving. At the current time, the economy seems to have stabilized, and virtually all economists are forecasting better days to come. By the year 2010, the United States’ annualized GDP growth rate should return to normal levels.

There’s a great deal of chagrin by the financial press that many of the largest U.S. companies are making their anticipated earnings for this quarter, but are failing when it comes to their gross revenues. The analysts seem to be uncomfortable with a company making its profitability numbers by cutting costs without having the anticipated revenues due to the recession. This attitude is simply not supported by the facts.

Corporations anticipated a downturn and dramatically reduced their costs. This has allowed them to make their projected profits at the disappointment (and in some cases, unemployment) of many of their employees. U.S. corporations are now “lean and mean” and are ready for improved gross revenues. If the corporations in this quarter are doing so well on lower than anticipated gross revenues, can you even imagine what types of profits they will realize with these reduced costs and normalized gross revenues? I think we should expect significantly higher profits in 2010.

I know that my readers get tired of me telling them it’s a good time to invest. I have been saying that fairly consistently since the beginning of 2009. Given the excellent returns that we have enjoyed so far for 2009, and with a reasonable expectation of better returns in the future, you can see why I continue to encourage you to invest in your future. While I cannot promise that your investments will do nothing but go straight upward from here, I do believe that over the next decade, you will have above average rates of return, especially in light of last year’s negative results.

At the risk of sounding like a broken record, if you have not made your IRA investment for 2009 or contributed to your child’s 529 plan, now is an excellent time to do so.

Saturday, July 25, 2009

Breaking News: Weekend Update

From the Desk of Joe Rollins

When I was a relatively young man, I took a job working in the accounting department of an international construction company that built elevated water tanks. I’ve written about my experiences at this job in the past, but current events have made me reflect on some of the lessons I learned from the elders at that company.

Mr. Elliott Brown, Sr., was barely 5’8” tall, but he had the reputation of being the toughest man in the tank building crew. He boasted – and I never heard anyone challenge him – that he could easily beat-up any other man on the crew, regardless of size. He was a true self-made man who began working in the yard of the old R.D. Cole Manufacturing Company in Newnan.

After Mr. Brown became disenfranchised with the R.D. Cole way of doing things, he opened his own manufacturing company in his backyard in direct competition with R.D. Cole. Even though he had virtually no education, he was street smart. Building elevated water tanks requires significant engineering support, of which he had little. He simply knew how to work hard and who the right people were who he could hire to help him. Slowly but surely he gained respect; and some time later, he purchased his former employer, the R.D. Cole Manufacturing Company. He lived in a 1,000-square foot house right next to the manufacturing plant until his death.

Mr. Brown was an interesting man, and late in life he wrote two books regarding tank building. He told me that he self-published the books because he didn’t think he’d live long enough to see them published by a company, and he was probably right. I’ve read both books and find them extraordinarily entertaining and insightful. They reflect a true American entrepreneurial spirit and the hardships of steel construction on the road.

Late in his life, Mr. Brown had a tendency to drink too much and oftentimes he would show up at the office in the middle of the day wearing his bathrobe with the smell of Listerine on his breath in an effort to cover up the smell of alcohol. All of us were amused when he would enter the office at lunchtime wearing his bathrobe, reeking of Listerine.

Mr. Brown would sometimes come into my office to discuss whatever was on his mind. These conversations would often go on for over an hour, but I would continue doing my work and let him ramble on. He seemed to be perfectly satisfied discussing issues whether anyone was listening or not. I was sad when he passed away years later, as I learned a great deal about business from Mr. Brown.

Being involved in the financial aspects of Mr. Brown’s business, I would seek his input when we needed to purchase new equipment. Two of his comments live with me to this day. I would approach him with a recommendation on buying a new piece of equipment, usually having worked out in my mind exactly how I was going to sell him on it. I’d say, “With this piece of equipment, we will be able to do our jobs better.” Almost always, his response was, “Sometimes you can go broke doing things better.”

The other thing that amused me about Mr. Brown and his frugalness was his inability to throw anything away. He was known to have kept every piece of equipment he ever purchased, well beyond its usefulness to the company. If I approached him about a capital acquisition and explained that someone in the company really wanted this piece of equipment, he would say, “Don’t let your wants get to hurtin’ you too bad.” At the time, his comments were very frustrating. But when I look at them through today’s eyes, I see the significance and importance of simply slowing down, taking a deep breath and thinking through your actions.

The current economic environment often reminds me of Mr. Brown. Wanting a “better” health care program will probably make us all go broke. Maybe it’s time for us to not let our wants get to hurtin’ us too bad. And so, I’ve been reflecting on some of the posts I’ve written over the last year to see what updated information I can provide to you.

On September 24, 2008, I posted that the TARP plan proposed by Congress was not a bail-out (This is NOT a Bailout!!). At that time, I said that contrary to what you read in the media, the TARP was not designed to be a bail-out. Rather, it was a loan to let the banks get back on even-footing. I indicated back then that it was highly likely that the Treasury would get back the money from the TARP, and they would also probably make a profit. An update of the current information supports my forecast from last September.

You may recall that the original TARP proposal was in excess of $700 billion. The intent was to buy toxic assets from the banks that later became an investment tool to buy the preferred stocks of those banks. Some people may not recall that the second half of the TARP ($350 billion) was never even utilized. The original numbers on the TARP were that only $204 billion was ever utilized to support the banks. There was another $100 billion that was put into AIG and to General Motors and Chrysler. These amounts were never authorized by Congress and never had anything to do with the original TARP act. They were simply used on an emergency basis to essentially nationalize those three companies. However, as it relates to the TARP itself, the numbers are overwhelmingly positive.

To this point, of the original $204 billion loans to banks, $70 billion has already been repaid to the Treasury. As of today, there is only $134 billion still outstanding from the related banks. Of this amount, $80 billion of it is to two financial institutions alone – Citigroup in New York and Bank of America in Charlotte, North Carolina. It appears now that the Treasury will recover every dime of this money. As such, to classify it as a “bail-out” was absurd, even though the majority of the public still believes to this day that the government bailed out Wall Street. Now you know the real story.

I even argued in that post that the Treasury would likely make money from this transaction. As of the end of May, which is the most recent record available on the government’s website, almost $6 billion has been repaid to the Treasury in the form of dividends by these banks. In addition to the above, many of the banks have bought out their warrants that were issued in connection with these equity offerings. In fact, Goldman Sachs agreed to purchase on Wednesday of this week their warrants for an amount in excess of $1 billion. The Treasury has absolutely no cost on investment in these warrants, and this amount is all profit.

Also on Wednesday, BB&T announced that they will repurchase their warrants this quarter for $67 million. I think we will see many more banks repurchasing their warrants and paying off their loans to the Treasury, which should offer a significant windfall to the taxpayers. Given that the bonds were issued to purchase these equity investments at a cost of approximately 1% per annum, the Treasury has so far enjoyed an enormous profit on these transactions. If you would like to look at the official government website of these amounts, please follow this link to review the spreadsheets that are updated regularly - FinancialStability.gov.

I’ve written many times about the 3-month Libor rate (View all of my posts mentioning the Libor rate). You may recall that I discussed the chaotic nature of the 3-month Libor interbank rate and the obstacles that rate causes other banks. Essentially, this is the rate at which banks loan money to one another. Since there was such a high level of pessimism among the banks that any other bank could repay their loans, the Libor rate skyrocketed to well over 5% at the height of the crisis in the 4th quarter of 2008. Here we are today, not even one year later, and the 3-month Libor rate has dropped to 0.5% per item. In fact, the 3-month Libor rate and the general credit spreads in the debts markets are lower today than when Lehman Brothers declared bankruptcy. You may recall that Lehman Brothers bankruptcy was the catalyst that kicked off the worldwide credit scare.

Credit spreads are defined as where interest rates are in respect to risk to the underlying securities. As the credit spreads widen, it signals a healthy debt market. Today those credit spreads are as wide as they have ever been, signifying normalization of credit conditions. In fact, I went back and checked to see where the NASDAQ Composite was when the credit spreads were as good as they are today. At that time, the S&P 500 Index was trading at 1,250. If it were to maintain that level today, that would be an upward move in stocks of approximately 30% from where it is trading as I write this post.

Because of all the publicity the health care reform has received, I have been reading more on the subject. It is really a scary time where the White House and Congress are trying to ram through legislation that will ultimately transform America as we know it today. There is absolutely no question that health care reform is needed, but a nationalization of the health care industry is not in any American’s best interest. I thought maybe I was swimming upstream on this matter until – to my amazement – I read The New York Times on Wednesday and noticed that they are also skeptical of the White House’s proposal - Challenge to Health Bill: Selling Reform - By David Leonhardt.

What I found especially interesting in that article is that 90% of voters already have insurance. Therefore, it’s natural for those who already have insurance that they are happy with to be skeptical and wonder why they’d want to approve such an overwhelming change in the system that could dramatically increase taxes and make fewer prospects for employment in the United States.

I think there is a general consensus that is now developing among most voters. Basically, people think the White House and Congress should slow down, take a deep breath and think this through clearly before passing the bill. I don’t think it could be more clearly conveyed than in the final paragraph of The New York Times article:

“In recent weeks, polls have shown that a solid majority of Americans support the stated goals of health reform. Most want the uninsured to be covered and want the option of a government-run insurance plan. Yet the polls also show that people are worried about the package emerging from Congress.

Maybe they have a point.”


When The New York Times questions whether this bill is appropriate or not, the liberal community needs to take notice. The New York Times has never been known for its conservative thinking – when they question liberal goals on health care reform, it will hopefully make everyone sit back and give it some additional thought.

The more that comes out about this plan, the more devastating it would appear to be to small businesses. I keep coming across things that absolutely “blow me away” when I think about how it would affect my clients. One of the provisions in the bill is that you can maintain your current medical plan, but it would come under the scrutiny of the new government-supported decision makers on medicine. Therefore, it’s clear to experts that all the plans would eventually offer the same benefits but the private companies wouldn’t be able to compete in price with the public option, which will be supported by your taxes. For that reason alone, private employers would opt for the smaller premiums, and in short order, there would only be one medical plan in America.

As detailed in the proposed bill, there are too many penalties for employers to continue to offer medical insurance to their employees. This is the reason the government plan will be the only survivor. For example, an employer would be required to pay an 8% premium on all employees they do not provide medical insurance coverage. Interestingly, this would include employees that elected not to participate. Therefore, if the employee elected not to participate, he would get his insurance provided for free at the full expense of the employer. What is even more interesting is that the employer would still have to pay an 8% premium even if an employee is covered under someone else’s plan (like their spouse’s).

Clearly, employees will quickly figure out the cheapest form of insurance and employers will choose the government plan since it would be cheaper. Additionally, there would be a burdensome reimbursement rate for employers. Under the House’s plan, businesses would be required to pay 72.5% of an employee’s coverage. My suspicion is that most employers do that anyway, but the biggest change is that employers would be required to pay 65% for family coverage. It is uncommon for businesses to pay for family coverage, much less at a 65% level. This one change alone will dramatically increase the cost to employers, forcing employees off private insurance programs and into the public plan in order to obtain family coverage.

Even though most people are not covered by self-funded plans like those offered by big businesses, there is still a high percentage of employees in the United States who are covered by self-funded plans. Essentially, this bill will mandate that those plans will cease to exist, and therefore, the benefits of self-funding the plan with no administrative costs will go away. As incredible as it may seem, the bill also opens the door for attorneys to sue any self-funded plans that do not currently exist. As a clear payback to the trial attorneys, this bill opens up the door for further costs of the system in frivolous litigation. Costs going down? The public is not this dumb!

In an opinion piece in The Wall Street Journal on July 20, 2009, they adequately sum up their take on the health care bill - Repealing Erisa. No matter how you feel about The Wall Street Journal, it is still one of the most respected financial publications in the world. The last paragraph of this piece summarizes their feelings on the bill:

“So when Mr. Obama says that “If you like your health-care plan, you’ll be able to keep your health-care plan, period. No one will take it away, no matter what,” he’s wrong. Period. What he’s not telling the American people is that the government will so dramatically change the rules of the insurance market that employers will find it impossible to maintain their current coverage, and many will drop it altogether. The more we inspect the House bill, the more it looks to be one of the worst pieces of legislation ever introduced in Congress.”

I don’t know about you, but if The New York Times and The Wall Street Journal are both saying we need to take a closer look at this matter, I think we’d be na├»ve to ignore their warnings. Let’s slow down and review this matter.

In my post of July 16, 2009 (Follow Up on the Cap and Tax Bill), I told you about my letters to the Georgia Congressmen regarding the Cap-and-Trade bill. If you recall, I asked each of them if they had actually read the 1,300 pages of this bill before they voted on it. As of today’s date, I’ve received only one response – from Representative Westmoreland who admitted that he hadn’t read the bill himself, but that he had voted against it. The other Georgia Congressmen have elected to ignore my letter, which presumably means they didn’t read the bill, either.

I think we should take a clue from this lack of response. Any representative who doesn’t read a bill prior to voting on it doesn’t deserve another vote of confidence from their constituents.

Interestingly, the health care reform bill also runs over 1,000 pages. Almost every day, I read where 20 to 30 pages of this bill are undergoing amendments. I read yesterday that in the House Finance Committee, there are more than 160 amendments to the existing bill that have yet to be addressed. Given what I have discovered on how many of our representatives actually read the cap-and-trade bill, I wonder how many people have read the 1,000 pages of the health care reform bill.

I think it would be useful for all concerned taxpayers to contact their representatives and ask them if they have read the Cap-and-Trade bill in its entirety that was passed by the House and the 1,000-page Health Reform Act being considered by the House. Remember that President Obama’s original deadline for approval on this bill is in only one week. I dare say that if it’s approved in that period of time, none of our respected members of Congress will have read the proposed act.

The Cap-and-Trade bill has lost a lot of its momentum in recent weeks and has yet to even be considered by the Senate. It’s likely at this point that if the bill is considered by the Senate, it will be dramatically altered, if not completely destroyed. What is even more interesting in the bill is that President Obama’s EPA administrator now admits that the law would have virtually no impact on the climate. It would seem to me that the bill was sold on the premise that it would have a major effect on the environment in its operation. What we now know is that it’s really only for the purpose of raising money and the bill itself has no environmental effect. Everyone agrees that we need to move towards a cleaner environment, but the last way we need to move there is by overtaxing businesses that employ Americans on a daily basis.

I once wrote in these posts that I get aggravated by those who point out only problems without offering any solutions. I guess I come from the “Keep it simple, Stupid!” point of view. There are lots of ways to attack the issues regarding the problems we are facing today. Admittedly, most of them are far too complex for the average American to understand, but here’s my shot at a few of them:

Rather than create a tremendous bureaucracy to tax carbon emissions, why not just add a simple tax to the gasoline tax? If there was a $0.20 tax attached to the sale of fuel that was separately allocated to environmental causes only, it would be much more focused and useful. Everyone would see the tax and know how the money was spent. Yes, it’s true that this is a regressive tax in that it taxes the rich and poor in the same manner, but it taxes based on your usage of gas, which is the correct way to tax.

The money received from this tax could be used to convert vehicles to run on natural gas. Natural gas is emissions-free, and there’s enough natural gas in the United States to provide for every car running in America today. It would be such a simple and easy transition automobiles that run today on gasoline to natural gas over time. The government would sponsor and provide natural gas fueling areas convenient to the cities and give tax incentives for taxpayers to convert their automobiles. Perhaps this idea is too simple that it defies logic.

It is now clear that the $743 billion stimulus bill was an absolute failure to this point. It was promised that this money would be spent on shovel-ready projects and would be immediately put into the economy. To date, the economy has lost two million jobs since its passage and only 10% of the money has even been spent. The administration now projects that the impact of the stimulus bill will not be felt until the end of 2010. That may be exactly the opposite of what we were told during the debate – that the money would be immediately placed into the economy to provide jobs.

There are ways that this could be fixed almost overnight. By reallocating some of the remaining stimulus money to fund federal highway construction, you could put that money into the economy almost overnight. The current gas tax fund is out of money, and therefore, private projects are not being funded. By using $30 billion to $50 billion of the remaining stimulus money, we could fund those jobs that have been delayed due to a lack of federal money. These projects are truly “shovel ready” and would not take two years to begin.

Additionally, there could be a FICA tax holiday for both businesses and employees for 90 days. By eliminating the FICA tax on both employers and employees, one-quarter of a trillion dollars could be put into the economy is only 90 days. This would be a 7.5% raise for each employee and employer for a short period of time. By virtue of such a simple provision, you could put more money into the economy in a shorter period of time than the stimulus bill has spent so far. During Christmas, it would help retail sales and increase employment immediately – not in the future. It would also be a nice holiday present for all working Americans.

The provisions related to the remaining stimulus money could be pared back to accommodate this request without spending more money. You wouldn’t need the constant Congress bickering about its own little private projects that do not create jobs, and you would put an instant and immediate charge into the economy that would benefit all Americans. I guess this is just too simple, and therefore, it will not work. Since it does not add to government earmarks, it’s unlikely that our corrupt Congress will ever even consider such a simple plan.

Health care reform will take longer to achieve. I am often asked by clients why the doctor groups endorsed the bill if it’s so bad. Quite simply, they were bought off in the proposal. Doctor reimbursements under Medicare go up 5% under the new bill. Essentially, they traded out their support for higher reimbursements. Similarly, the pharmaceutical companies and the hospitals have traded out not for higher reimbursements, but so they would not have catastrophic reductions. Essentially, both agreed to lower reimbursements in order to block out the potential for something quite worse.

The more I get to thinking about the numbers, the more I question why we’re going through so much trouble. If there are 47 million Americans not covered under a medical plan today, that doesn’t mean that they don’t receive medical care – they’re just not covered under a plan. As you well know, any sick person that enters an emergency room in the United States is required by law to be seen, whether or not they have insurance. Of the 47 million uninsured, 10 million are illegal immigrants.

The true number of uninsured American citizens borders on 35 million. A great number of these individuals can be covered under other plans, but they have elected not to be covered. Essentially, of the U.S. population of over 300 million, only 10% of the population is uninsured. We as a country certainly need to do something to cover these people, but in a manner that doesn’t break the bank for taxpayers.



I always find it interesting that the poor go to the emergency room for care regardless of how minor the injury. Emergency care is the most expensive medical care in America due to the highly sophisticated nature of that care. All the government has to do is develop clinics for routine care instead of making emergency rooms be the sole providers for the uninsured. The main concern is catastrophic conditions that would essentially bankrupt the individual. It would not cost that much money for the government to basically develop a catastrophic universal policy that would be a safeguard for all Americans for large medical expenditures.

Everyone is now talking about how this medical care reform bill will affect Medicare. Quite frankly, there is a simple and swift solution to the exploding Medicare costs that should be addressed immediately. When it comes to Medicare, one of the principal fixes would be for higher income individuals to pay more for the cost of Medicare. There’s a deal currently in the works, and I have clients who are seeing their premiums increase. However, it’s not effective and not universally applied to those who could afford to pay for Medicare if they so elected. Additionally, many people on Medicare have private policies that overlap, and therefore, create duplication. A simple fix would require potential recipients to choose one or the other, but not both.

The simplest fix for Medicare and Social Security is to increase the age limits for coverage. While younger people cannot collect full Social Security until age 67, the age for collecting full Medicare benefits is 65. If the government began increasing that age today, it could be moved to age 70 without affecting anyone over the age of 40. This would dramatically reduce the actual cost of servicing the younger generations with a Medicare plan that has no funding and only gets its funding from employees who are currently working. Since young people are a long time away from collecting Social Security, I highly doubt they’d object to such a change.

With the length of this post, I’m sure I’ve lost most of my readers already. I could give you many more “KISS” solutions to governmental issues. One thing I always scratch my head about is the issue concerning balancing the federal budget. When the State of Georgia cannot balance the budget, the Governor requires each department to cut their budgets enough of a percentage to balance the current budget. It’s not pick and choose an expenditure; it’s cutting all expenses by whatever percentage necessary.

With the current deficits projected under the Obama Administration at approximately $2 trillion per year, then every federal department would have to cut their budget by 50%. The government receives $2 trillion a year in revenues, but spends $4 trillion. I cannot tell you one more bullish move that the federal government could make today to improve the U.S. economy and the financial status of the United States in world economics than cutting the size of government by 50% overnight.

As always, the above are my opinions, thoughts and observations. Of course, I could always be wrong.

Saturday, July 18, 2009

A Summer Holiday? Hardly! It Was a Great Week for Investors

From the Desk of Joe Rollins

While driving down Peachtree Street earlier this week, I could not help but note that there was virtually no traffic on the road. In spite of this, I traveled through six traffic lights without once hitting a green light. Throughout the entire world, cities and towns have computerized traffic light systems that help the flow of traffic; the City of Atlanta has yet to acquire that sophisticated technology. In fact, if you ever want to test the efficiency of Atlanta’s traffic light system, just drive down Peachtree Street at midnight. Even when no one is on the road, you’ll be stopped by red lights more often than not. But I digress…

When I entered the Colony Square parking garage that day, there were almost no cars parked on the top level. I suppose all of the above is reflective of the slow, hazy days of summer. Because of vacation schedules, there aren’t many people actually working, and due to the heat, I suspect people’s thoughts are absorbed by taking a holiday.

If you haven’t noticed, we’ve recently had a major stock market rally. Perhaps the lack of news is positive for once. As I write this post, the Dow Jones Industrial Average is up a cool 7%. I’m not talking about the Dow’s performance for the year; I’m talking about for the week. Since the Dow bottomed on March 9, 2009, the index has gained an astounding 33%.

The Standard & Poor’s Index of 500 Stocks is also up a sterling 5.8% for the week. Since the S&P’s bottom on March 9, 2009, that index is up an incredible 37%. There’s no question that the true stellar index so far in this rally has been the NASDAQ Composite. This week, the NASDAQ has gained 7.3%, and since its bottom on March 9, 2009, it is up an amazing 49%.

While most Americans have been planning their summer vacations, there’s been a stealthy rally going on; most people haven’t even noticed it. The markets are not gaining because the economy has recovered. Rather, the markets are gaining because they anticipate the economy’s recovery. As I’ve often said, the stock market doesn’t need to see the economy improve – it only needs to see it quit going down. Today we have the evidence to prove that the economy has finally stopped going down.

During Thursday’s trading day, Nouriel Roubini, a long-time gloom and doom forecaster, proclaimed that the U.S. economy would be out of recession before the end of 2009. The market moved up a small amount with that surprising reversal proclamation. Later in the day, there must’ve been too much positive news for Dr. Roubini, and he reversed his position, indicating that he’d been misquoted. He then said that the U.S. economy was in a 24-month recession that he anticipated would not end until the end of 2010. Notwithstanding his complete 180-degree change in economic forecasting during the course of the day, we should examine his other economic forecasts.

If you read my post from May 16th titled “The Most Important Stock Market Week of the Year!” wherein I discussed the famous doomcasters, Dr. Roubini and Paul Krugman, you’ll see that both of them were forecasting a complete seizure by the U.S. government of all banking institutions. Both indicated that there would be no way for the banking industry to survive without the full and complete seizure of the banks by the U.S. government. In the last three days, CitiBank has reported a profit of $4.3 billion for the quarter, Bank of America earned a tidy $3.2 billion, and J.P. Morgan Chase earned $2.7 billion. I suppose the economic reality of positive financial results completely contradicts these doomcasters’ forecasts.

Just as I predicted in my “2nd Quarter Financial Review” post on July 2nd, banks are reporting blow-away profits. It’s often said that an investor would be ill-advised to ever discount the U.S. economy. It seems that these noted economists have discounted it, and therefore, their forecasts should also be discounted.

I also continue to hear from the financial news and others I’ve spoken with that the banks’ losses have yet to be realized. It seems that the public doesn’t understand how accounting really works. If you don’t believe that the accountants haven’t already fully and adequately reserved for these potential loan losses, then you don’t really understand the conservative nature of accountants. Due to the sheer cost of malpractice insurance, you may rest assured that not only are the losses fully recorded on the books of these banks, they are also grossly over-recorded. You may think I make all this stuff up, so here’s the information directly from The Wall Street Journal:

In Friday’s edition, The Wall Street Journal had a detailed analysis of J.P. Morgan’s earnings for this quarter, including information regarding loan losses. For example, they reported that non-performing assets at June 30th were $17.5 billion as compared to $6.2 billion one year ago. “Non-performing assets” is a bank term that doesn’t necessarily mean that the assets are bad, but that the holder of those assets is not currently paying interest. In fact, a vast majority of these loans will be later recovered. You may rest assured that none of these loans are uncollateralized, and even if the collateral has been reduced by 50%, the bank is more than likely going to collect at least half of the non-performing amounts. One might assume that this would be a worrisome sign for the banks, but as mentioned before, the accountants have already provided for this potential liability.

The article also pointed out that later in the quarter, J.P. Morgan set aside an additional $1.8 billion reserve for future credit loss reserves. With this addition, it brings the total reserves for future bad debts to $30 billion. Assuming that non-performing assets were 50% bad, which I consider to be ridiculous, it would mean a potential loss of $10 billion on these non-performing assets. The bank has already provided a reserve three times as high as the potential losses on non-performing assets.

I will also forecast that in the coming year, we’ll see these banks start to reverse these over-exaggerated loan loss reserves and return them to income. My analysis of these particular numbers is that J.P. Morgan Chase has excess reserves close to $15 billion against loan losses. As these amounts return to income during 2009, the financial press will express amazement at the profits suddenly earned by the banks. In fact, it will only be an accounting sleight of hand where it will appear that profits were generated at that point when they were, in fact, generated now.

You have to love the way the government pulls accounting sleights of hand. Even though California is technically bankrupt, they are still continuing to try to balance their budget for the fiscal year that started July 1, 2009. One incredibly creative means they’ve used to balance the budget is by changing the date of their payroll. By changing the June 30, 2010 payroll to July 1, 2010, that payroll is not included in the 2010 budget. It’s amazing how California just saved half of a billion dollars by moving its payroll out one day.

Profits reported this quarter through the first two weeks of the reporting season have been nothing short of “breathtaking.” Goldman Sachs, a company that was previously forced to take TARP money, reported record profits during the quarter. “Record profits” is a term that is used too often, but to put Goldman Sachs’ situation in context, they reported earnings higher during this quarter – in the middle of a recession – than they have ever reported in their entire history since going public.

In addition to Goldman Sachs, Intel reported blow-away profits along with IBM, and of course, the aforementioned banks. Profits have so far been nothing short of staggering given the so-called backdrop of an economic recession.

I told a client yesterday that I felt the need to write a blog on why the public is missing the correlation between unemployment and corporate profits. One of the beauties of technology today is that a manager who knows how to use it can adequately forecast upcoming trends. You’ll recall the gigantic layoffs that were announced over the last few years. During 2008, businesses were making significant personnel layoffs in order to cut costs. From an accounting perspective, they recorded the full cost of the layoffs immediately, even though some of the employees do not leave for weeks, months or sometimes years. Therefore, the layoff costs have occasionally been reported in prior years. Businesses are as lean and mean as they have ever been.

Without the additional payroll costs and because of other cost-cutting moves by corporations, they are able to report record profits. The good and the bad of this is, of course, that the corporations have record profits, but many Americans are without jobs. It is somewhat ironic that we celebrate the success of the corporations to the detriment of the people not employed. However, that’s the basis of capitalism, a concept we used to cherish in this country.

It’s often said that unemployment is a lagging indicator and is the last to turn up. The reason for that should be quite obvious: Corporate employers will continue to operate as lean as possible until the very last second. They’ll refuse to hire more personnel until they’re positive an economic recovery is at hand. Employers will first work their employees more hours and even overtime to get productivity up. They’ll use technology and better computer applications to avoid hiring personnel. It will be a significant amount of time before we start seeing employment start increasing.

It now appears that the employment base has stabilized, so it should be running on a replacement basis for six to eight months. I would not expect any significant improvement in the unemployment rate until at least this time in 2010.

I have been reading the daily articles written on the ridiculous national health plan as proposed by the Democrats in the House of Representatives. In fact, I dedicated an entire post on the subject (“Healthcare Relief without Universal Health”). However, yesterday’s events illustrate how completely out of touch Congress is when it comes to the business world. Yesterday, the House of Representatives pointed out their potential bill for revolutionizing the health insurance industry in America. I will not bore you will all the details, especially since many of them will be changed before the bill gets its final vote.

The bill does contain information on how the cost of the plan is to be financed. One of the proposed changes will be a major hit to the U.S. economy during a time when it certainly does not need additional taxes. What is even more interesting is that we have long been told by the administration and Congress that the proposed changes would bring down health costs, and that the plan would be neutral. Yesterday the Congressional Budge Office reported that the cost savings were just an illusion. Under the proposed plan, health costs would actually increase.

Mr. Elmendorf, director of the independent and non-political Congressional Budget Office, told the finance committee, “In the legislation that has been reported we don’t see the sort of fundamental changes that would be necessary to reduce the trajectory of federal spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs.” Therefore, we know that nothing in the proposed plan will reduce costs.

Speaker of the House Nancy Pelosi said yesterday afternoon that she would squeeze more costs out of the system. By “squeezing more costs out of the health system,” she means fewer services provided by medical institutions. Essentially, the government will pick and choose what medical procedures you need to have and what they’re willing to pay for them. It’s very clear that there will become a rationing of medical services, but the ultimate question is who will be deciding which services are rationed. Will that be you, or will that be the government?

In addition to the rationing of services, they are proposing an 8% payroll tax on all employees where group medical insurance is not provided. Therefore, if an employer elects not to provide medical insurance for their employees, they have the option of simply paying 8% directly to the government plan, which will then provide medical insurance to the employee. I anticipate that once this plan is implemented, virtually all employers will go to the government plan almost immediately. Here’s an example for you to ponder:

If you’re paying $5,000 to $6,000 per year, per employee for medical insurance, and the average employee in America makes $40,000, an 8% premium for this government-provided insurance would be $3,200. I anticipate the vast majority of all employers will gladly choose to get rid of the headache of providing healthcare for their employees and instead take a guaranteed 8% premium in the form of payroll taxes. I anticipate that within five years, there will be only one insurance company in the United States, and it will be the one run by our own government.

In addition, there’s a 2.5% tax on all individuals who do not buy medical insurance and who are not employed by someone, meaning that the self-employed would pay a 2.5% tax to get medical insurance. I can assure you that every self-employed individual in America would gladly pay 2.5% of their income to get medical insurance and avoid the hassle of finding an individual policy.

The logical question to all of this is how everyone’s cost of insurance can go down from where it is today with this sort of plan. Employers will be paying less, the self-employed will be paying less and yet we would supposedly be covered by a fully adequate, government-sponsored medical plan. It doesn’t take a rocket scientist to see that any proposed plan will be heavily subsidized from your tax dollars. Since only 50% of the U.S. population pays tax anyway, the full burden of the taxes to pay for this medical insurance will be assessed to only half of those who are receiving benefits. Duh?!?! Am I missing something here?

Also, the above provisions will dramatically change the perception of how employers will employ people. Take an industry where virtually no one is currently providing medical insurance – the restaurant industry. In that industry, the vast majority of employees are young and healthy individuals who have no desire to purchase their own medical insurance. Now the employer is faced with the legal obligation to provide medical insurance, whether or not the employee wants it.

Under the universal healthcare plan, you would be obligated to pay Social Security tax for that employee at 7.65% the very first day an employee is on your payroll. In addition, the employer would have to pay 3.2% Federal and State unemployment and the 8% government-mandated percentage on health insurance. Therefore, the first day on the job for a new employee, the employer is obligated to pay 18.87% in some form of matching taxation on this employee.

There are very obvious conclusions that will be reached by employers. The first and most important is that they’re going to hire everyone more slowly, which is the last thing this economy needs now. Remember that for every dollar you pay an employee, you’re paying almost 20% additional for these social services. This one act alone will make the recovery of employees working in America very slow. No employer is going to incur this cost without a lot of thought and evidence that the economy has recovered.

I’m sure none of you are concerned with how the government is going to efficiently run their proposed healthcare system. The Wall Street Journal reported on Friday morning that only one month after the United States became the principal shareholder in General Motors and Chrysler Group, LLC, our Congress is now interjecting in the business. Even though both of these companies eliminated 3,200 dealerships to cut costs so that they would to improve profits to pay back the government, Congress has already voted to have all 3,200 dealerships reinstated. I cannot even imagine what Congress will do once they get control of the healthcare system in the United States!

You may also recall that it was said there would be no tax increases on anyone making less than $250,000 under the new proposals. If anyone really believes that this is not a tax increase, then they really don’t understand business dynamics. Since the employer is going to be required to pay this extra 8% cost that they have never been required to pay before, where do you really think this money is going to come from? It will come dollar-for-dollar out of the payrolls of future employees. A clearer example of an indirect tax could not be better illustrated.

Whatever your thoughts are about former Georgia governor and U.S. senator Zell Miller, you must admit that he is somewhat amusing. He gave a speech recently to the American Legislative Exchange Council, wherein he remarked, “Today, we’re spending like we’re Paris Hilton, regulating like we’re Ralph Nader, nationalizing like we’re Hugo Chavez, printing money like we’re the Weimar Republic, and taxing like we’re well, the Democratic Congress.” Although Zell continues to be a member of the Democratic Party, he is clearly not in step with the current Democrats in Washington.

I’ll always be grateful to Zell Miller for one thing – against overwhelming odds, as Governor he was able to get the Georgia Lottery through a conservative and backwards Georgia legislature. Regardless of your feelings on the lottery, it has made affordable education for every student in the State of Georgia that desires an education and is willing to work for it. Due to the Georgia Lottery program, universities in Georgia now have more applications than they can even process. It was a bold move on his part, and in retrospect, it’s done a great deal of good for many Georgia kids seeking a higher education.

I hope you had the opportunity to watch some of the Congressional hearings this past week with former Treasury Secretary Paulson. This country needs to get a grip on how poorly educated and uninformed our Congress really is. I would think that in civics classes around the world, they are pointing out the complete illiteracy of our Congress regarding financial matters. If we learn nothing else from this economic crisis, we need to elect representatives that have more than a few IQ points to rub together.

Zell Miller’s statement above sums up how things are going in Washington today. As I’ve mentioned on numerous occasions, our government’s incredible mismanagement gives me great optimism that new legislators with better financial constraint and an understanding of economic reality will shortly be elected.

As always, the foregoing are just my opinions, and of course, I could always be wrong.