Wednesday, January 6, 2010

Think Health Insurance Is Expensive Now? Just Wait Until It’s Free!

From the Desk of Joe Rollins

Those of you who regularly follow the Rollins Financial blogs are probably aware that I’ve taken a holiday from contributing posts over the past three months. This isn’t because I had nothing to report; rather, my editor/grammar police chief, Jennifer Wilcox, has been on maternity leave until today. Now that she’s back, I can finally give you my opinion on some of the hottest news topics.

After the Standard & Poor’s Index of 500 Stocks was down close to 37% in 2008, who could’ve guessed that we’d see such a remarkable and positive turnaround in 2009? Not many people forecasted that the equity markets would turn on a dime in mid-March and that we would have such a massive rally in both stocks and bonds in 2009. That the financial markets have improved has been very comforting to investors as witnessed by the fact that attitudes have become somewhat more positive due to market improvements. There will likely be difficult days to come, but at least things are moving in the right direction. Over the next few weeks I will write more extensively on the economy and the prospects for a better economic life in 2010 and 2011, but I won’t bore you with those issues today.

I have a lot to say about the new health care reform act passed by the Senate. While corruption in Congress isn’t exactly surprising, I can’t recall ever seeing such an important bill passed with such dishonesty, payoffs and abuse of political power. For instance, I’ll never understand how a provision was put into the bill for the federal government (read my lips – that means you and me) to pay 100% of Nebraska’s future Medicaid tab – in perpetuity.

I couldn’t help but notice that my own firm’s medical insurance premiums have increased 50% over the last 14 months. When premiums practically double over such a short period of time, there is no question that something needs to be done to reduce the burden of insurance costs to individuals. That being said, it is a complete embarrassment that our elected officials have taken something as important as health care reform and have turned it into something that can only be bad news for our country. Much more on this bad legislation to come…

On another subject, I was encouraged to see the S&P Index up 26.5% for 2009. The other major market indices had great years, with the Dow Jones Industrial Average up 22.7% and the NASDAQ Composite up 45.3%. At the end of February 2009, all of these indexes were down in double-digits at 20% in losses, and the fact that they all had 20% positive returns is nothing short of spectacular.

The portfolios under management at Rollins Financial also had an excellent year. Keep in mind that the percentages reported for the major market indices above are theoretical in that they do not include the cost of operations or expenses and they have constant money, which is to say that no money is going in or coming out as the year progresses. However, the calculation for our performance at Rollins Financial is not so simple. First, we have a broad range of clients age-wise – from the very young to the elderly. Additionally, we have a small cost associated with our business transactions. Because we compare our returns to the major market indices (which have no business transaction costs), we naturally assume that any investor would have a difficult time earning a rate of return equal to that of the major market indices. Furthermore, our accounts have a constant movement of funds – both in and out. I’m not making any excuses; I simply want to point out that when you compare rates of return, you must keep all of the facts in mind. The major difference between our accounts and the major market indices is the investment horizon of our clients. Our elderly clients have an entirely different financial requirement than do the very young who have a minimum of 30 or 40 years before they will need the money.

For all of 2009, our average account under management generated a return of a little over 21.8%. While some of the accounts had a higher percentage and some of the accounts were lower, the fact that the average all accounts was at 21.8% is nothing short of extraordinary. As we start to send out year-end portfolio summaries over the next few days, I hope you will take the time to evaluate what a remarkable financial turnaround we’ve had in 2009.

Even with all the controversial items being reported by the press every day, I still think the future looks bright for 2010 and the U.S. economy. I see no waning of the explosive growth in Asia and Latin America, and I believe 2010 will be an excellent investing year even though it appears that the average investor is still not participating. It’s always been a mystery to me why investors tend to throw money at a strong stock market but refuse to invest when the markets are cheap. I’ve been begging my clients all year to make their IRA contributions and invest for their futures. Unfortunately, many investors missed a great market performance in 2009 by electing to sit in cash, which is essentially earning zero at this time.

It’s truly amazing that the U.S. economy – after GDP losses in the 6% range at the beginning of 2009 – will likely end the year with two straight quarterly GDP gains. It appears that the final 3rd quarter GDP growth numbers will be in the 2.6% range, and I am projecting that the U.S.’s GDP for the 4th quarter will be in excess of 4%. It’s even more incredible that this turnaround in GDP growth was completed without the help of Congress’s so-called “Stimulus Act.” In fact, the bulk of the stimulus money will not be spent until the end of 2010, and by then, the economy will have recorded six straight quarters of positive GDP growth. This is yet another sign that your tax dollars are being misspent by Washington.

The employment numbers for December will be announced at the end of this week. It’s highly likely that for the first month in many years we will have a positive employment growth. While the employment growth will be anemic, at least it will be positive. After all, unemployment can’t be reduced until Americans start being re-hired.

It’s ironic to me that Congress is passing bill after bill that only discourages employers from hiring employees. I can think of no clearer example of this than the new health care reform act that was recently passed. If you look at every single poll on what Americans think is the most important issue, it’s employment. This is just another case in point of how Congress is totally out of touch with the desires of most Americans.

In the coming weeks, I will write more extensively about the complete misuse of governmental funds in Washington, but I don’t want to bore you today with those facts. But I do want to give you one fact to contemplate: Over the last 12 months, more money was spent by your federal government than in the entire eight years of the Clinton Administration. To make matters worse, the federal budget for 2010 will be even higher than the amount spent in 2009.

I’ve read extensively over the last several months on the subject of the economic crisis in America, including House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan, The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System by Charles Gasparino, Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street by Janet Tavakoli, and Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves by Andrew Ross Sorkin. I am directing your attention to these particular books because it’s probably unlikely that many people have gone through the trouble of reading these in-depth, exhaustive accounts of the economic crisis.

What became clear to me after reading all of these books on the subject is that it crisis had a lot less to do with greed than with stupidity. It’s hard to fathom that people who were personally making literally billions of dollars could’ve exercised such incredibly poor judgment and intellect. In almost all of these cases, the people involved ended up with nothing. I think investors who try placing the blame of the financial crisis on greed need to understand that it was less of a motivating force than just bad business decisions.

I wrote in my TARP – Bait and Switch? post that the TARP program wasn’t a bailout. Less than 18 months later, virtually all of the banks that were supposedly bailed out have repaid the government in full, with interest, and with additional incentives. But as I feared, the program no longer loans to banks; it loans to companies that will never repay the money. The TARP has been expanded to make ridiculous loans to General Motors, Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). There’s no chance that these loans will ever be repaid, so kiss it goodbye.

Additionally, the government is now using the money for another stimulus package that will not work and for foreclosure support that has no possible chance of working. What was once a well conceived plan to assist the banks through a difficult time was extraordinarily profitable for the federal government. However, it’s now turned into a governmental slush fund to distribute political paybacks. As if often the case with our government, a well conceived idea is quickly turning sour due to political interference.

I read articles on an almost daily basis concerning the declining value of the dollar. The reason for the decline should be fairly clear – growth in other parts of the world is significantly higher than it is here in the United States. In any event, there is a byproduct of a lower dollar that receives little attention. Exports from the United States to the rest of the world are currently exploding. These exports are building jobs and helping to improve our economy. While a declining dollar can become detrimental, at the current time it is beneficial to us. I anticipate that the dollar’s decline will soon slow and at least stabilize against the rest of the world’s currencies. Of course we need to do significant work to reduce our federal deficits before the dollar will rally, but at least there is an end in sight.

The coming years will not be without problems. The first problem on the list is the federal deficits, which are unsustainable, out of control and indicative of a completely irresponsible Washington. The deficits can only be addressed when new representatives are elected to Congress in 2010.

I fully anticipate that unemployment will continue to be high and will probably be at 8% through the end of 2011. The high federal deficits and high unemployment will keep growth in the United States below par for at least a few more years. However, that doesn’t mean the stock market will go up.

Taxes will soon be increased almost across the board. Almost everything the government is doing now to help a staggering economy is wrong. It’s interesting to note that the major tax to fund the Senate’s health care bill is almost totally focused on lower income individuals. For instance, there is a new 40% tax on “Cadillac” health care plans. Since almost all of these plans are sponsored by unions and governmental agencies, most of the tax will be passed along to the employees that have these plans.

It’s estimated that 50% of these plans are maintained by employees that make less than $100,000 per year. Even though the concept was designed to tax the plans of wealthy bankers and Wall Street, it will actually only affect hardworking Americans who are struggling to get by already. Remember those promises last year that no one making below $250,000 annually would have their taxes increased? In short, these funds coming out of the economy will do nothing to increase its growth.

Even though we are facing many negatives, it’s still quite remarkable to see the U.S. economy climb from the sharp deficits of 2008 and the first part of 2009. We are now seeing a sustainable positive GDP growth in the U.S., and while it’s certainly not robust, it is at least positive. As corporate profits rebound in 2010, stock prices will go up. I fully anticipate an investment year in 2010 that should generate 10% returns. If you have not invested recently, this is certainly a major disadvantage to your long-term financial goals.

As always, the foregoing are my opinions, projections and personal biases. It is perfectly possible that I am wrong.