Saturday, September 24, 2011


From the Desk of Joe Rollins

No surprises here – at the close of the 2-day Federal Open Market Committee (FOMC) meeting on Wednesday, the Fed announced its latest effort to encourage the economy – a strategy to help further lower long-term interest rates and decrease mortgage rates consistent with expectations and my forecasts discussed in . Here’s the meat of the plan:
  • By the end of June 2012, the Fed will be purchasing $400 billion of mid- and long-term Treasury securities (maturities of 6 to 30 years), and it will sell an equal amount of short-term Treasury securities (maturities of 3 years or less).
  • The Fed will also reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities with remaining maturities of 3 years or less.
  • The Fed will keep the target range for the federal funds rate at 0 to ¼ percent.
  • As anticipated, the Fed will not be printing any new money in this plan.
Market Reaction

With the FOMC pointing out “there are significant downside risks to the economic outlook” as its decision to extend the maturity of its securities holdings, the world markets tumbled yesterday. But this is likely a short-term hiccup, and as I stated on Tuesday, the Fed’s move is better than doing nothing. It will hopefully spur companies to start investing their cash and also allow for better borrowing terms and an increase in household spending. All of these positives would ultimately help increase employment and promote price stability – the Fed’s two statutory mandates.

Even so, the Fed’s somewhat dour outlook along with signs of a slowing in Germany’s economy and a shrinking in China’s manufacturing hammered stocks and commodities yesterday. Meanwhile, the Dollar Index climbed to 1.3% – a 7-month high – and 30-year Treasuries dropped to record lows. Still, the FOMC did say in their announcement that they expect the economy to improve, stating that “The Committee continues to expect some pickup in the pace of recovery over coming quarters.” This statement wasn’t discussed much in the press, which mostly focused on the dismal news. As you may recall, the first two quarters of 2011 were marginally positive. With the Fed’s forecast of an increase in the recovery pace, I can only assume that they believe the second half of the year will be better than the first.

Last week, the market had a positive return of over 5%. Over the last two days, the market has gone down over 6%. To me, this emphasizes the volatility of the market and not the overall direction in which the market is heading. As I write this post, the S&P is down 10% for the year, and as last week’s performance indicated, this could be cut in half in only five trading days.

This morning on CNBC, Jack Welch, the former Chairman and CEO of General Electric, stated that of the 11 public companies for which he consults, not one of them is down. He optimistically opined that U.S. corporations are functioning okay on the low side and fabulous on the high side. His sentiment is that corporate America is leaner, more productive and more profitable than ever. Hence, what has happened in the market since the Fed’s announcement on Wednesday is a mystery to those of us who evaluate the market based upon these fundamentals.

It feels like we’re receiving an avalanche of misinformation regarding the U.S. economy. I’m not sure if this is because technology spreads news like wildfire – much of which seems to be distorted – or if politicians intentionally misstate financial facts and data. During last night’s fifth GOP presidential debate, there was a lively discussion regarding Fed Chairman Dr. Ben Bernanke – with some candidates suggesting that Bernanke was intentionally destroying the value of the dollar and undermining our future by cutting the international value of the U.S. dollar. Interestingly, the value of the dollar is actually unchanged for the last four years – another reason to not believe politicians when they spout off economic “facts.”

In spite of the market’s performance, the Conference Board, a global research association of independent business leaders, released a report on Thursday reflecting that the index of U.S. leading indicators was higher than its original forecast in August, signifying accelerated growth heading into 2012. So while the market may seem disappointed that the Fed delivered only what was expected and nothing more – and even with the bleak economic news around the world – I don’t foresee the markets continuing to spiral downward.

I also disagree with those who say ‘Operation Twist” will likely fail and that the U.S. is on the verge of falling into another severe, prolonged recession. As I’ve indicated on numerous occasions, while growth certainly isn’t robust, I still believe there will be a pickup in recovery over the coming quarters and the unemployment rate will decline – even if only at a gradual pace. So, while my belief that equities will improve in the months ahead remains the same, we will continue to watch the markets closely and make any necessary changes to our portfolios under management. For now, however, I still believe that we are better off invested in stocks than anywhere else.

The worldwide sell-off in the equity markets is riddled with inexplicable contradictions. For the first time since 2008’s broad market sell-off, equities and gold took a simultaneous nosedive; these asset classes typically move inversely to one another. With the rally of the dollar, almost all commodities were hard-hit yesterday. But the price of crude oil was down dramatically, which is a direct positive for the economy and an indirect positive for the stock market.

Last night I reviewed the worldwide GDP growth to make sure I haven’t been hallucinating. It appears that China will have GDP in 2011 of approximately 9%. India’s GDP growth is anticipated to be 6% to 8%, and Brazil is expected to have GDP growth of 5%. From the raw data, it appears that Europe will be flat or marginally negative, and the U.S. will be flat or marginally positive. There are currently no solid facts that would explain such a massive market sell-off under these predictions.

I mentioned that the U.S. GDP for the first two quarters of 2011 was marginally positive, and it certainly appears to have picked up in the 3rd quarter of 2011. Based on my rough calculations, it appears that the GDP will be about 2% positive for the 3rd quarter, which ends next Friday. That’s certainly not robust, but it’s not negative or indicative of a major ongoing recession, either.

I see very few solid facts to back-up the selling spree on Wall Street. Fear seems to be the main driver, which – in a contrarian sort of way – is positive. With dividend yields on utility stocks now in excess of 6%, it is hard for me to imagine a knowledgeable investor continuing to sit in a 10-year Treasury at 1.7% when AT&T can be bought with a 6% dividend yield. That being said, I fully understand the apprehension when the market is so volatile. Corrections are often painful to endure, but the natural mechanism of the market is that there are major swings on both the upside and the downside due to traders trying to gain an advantage. Investors should expect a market move of 10% to 20% at any time, and should certainly not be surprised by such moves. In the end, however, fundamentals will rule – and the current fundamentals concerning earnings bode well for investors.

It was also argued that the market sell-off was due to a rotation from equities into the safety of Treasury bonds. However, the 10-year Treasury is currently trading at 1.73%. No savvy investor would buy a 10-year bond at this low rate when inflation is expected to exceed 2%. These buyers are either dramatically concerned about a possible worldwide depression or they simply do not understand the time value of money. It’s hard for me to join the depression camp when I’ve not read a single reputable economist projecting negative GDP in the next few years.

This sell-off is also contradictory because it is happening in the face of extraordinary earnings. It now appears that 3rd quarter earnings will reflect the highest earnings ever recorded for the S&P 500. How is a major stock market sell-off even reasonable in the face of such extraordinary earnings? The S&P 500 has a dividend yield in excess of the yield on the 10-year Treasury bond, which has happened only a few other times in history. This brings to light the major difference between traders and investors. Aside from those investors making fear-based decisions, most investors would never buy a 10-year Treasury earning 1.73% when the S&P index generates 2.25%. Moreover, the 30-year bond is trading at 2.8%, which is the lowest yield ever recorded on such a long-term bond. While everyone would like to believe that inflation will be less than 2.8% over the next 30 years, there’s certainly no historic evidence to indicate that to be true.

My next post will focus on the difference between traders and investors. Traders work on short-term variations while investors look to the long-term, and I will provide my complete analysis on this subject and how it impacts the stock market early next week.

Lastly, I want to reiterate our standing invitation to discuss your portfolio and financial matters with us in person or over the telephone, whichever is more convenient for you. We’re aware that the markets have been worrisome over the last few months, and we want you to know that we are always available to discuss your questions and concerns and our strategy for your financial goals. Please contact us at 404-892-7967 if you would like to schedule a meeting to review your personal financial plan.

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

Best regards,
Joe Rollins

Friday, September 23, 2011

The future is something which everyone reaches at the rate of 60 minutes an hour, whatever he does, whoever he is. ~ C.S. Lewis

From the Desk of Joe Rollins

Regardless of your financial situation, an estate plan at the time of your death, even the most basic one, will save your loved ones a lot of unnecessary time and money. Trying to figure out where to begin seems to be a concern for many of those without an existing one in place, so I thought I’d take a few minutes to just run through the basics. The following is not applicable to those with estates totaling $5 million or more, as legal advice should be sought.

Every dollar spent on probate is avoidable

The simplest way to get started would be to create a list of all your assets (retirement savings, IRAs, 401(k)’s, life insurance policies, real estate, etc.) and ensure that they are properly titled. When given the opportunity to appoint beneficiaries for accounts, always do so. These are known as ‘non-probate assets’ and will be passed on privately and automatically upon your death, typically without any involvement from the courts; naming a person as your beneficiary, as opposed to an estate, is also recommended in order to avoid probate costs. Assets that don’t require a named beneficiary, such as deeds, CDs and brokerage accounts, have caused countless problems that could be easily avoided by simply having a Transfer-on-Death or a joint tenancy with right of survivorship (JTWROS) agreement in place.

Where there’s a will there’s a way

Everybody needs to have a Last Will and Testament in place. This crucial document specifies exactly how your affairs will be handled in the event of your death. It also prevents your family members from having to take on the labor-intensive task of trying to track down all of your existing assets; a will allows you the opportunity to conveniently itemize all of your assets and specifically state how they are to be distributed. A will is also ideal for directing what you would like to have done with your remains, and, if relevant, establishing guardianship for your children.

The show must go on

In addition to your will, you should also assign a power of attorney to handle your finances should you no longer be able to do so yourself. Let’s face it, you’re more likely to become ill and incapacitated than face an instantaneous death and like it or not, the bills still have to be paid. Find someone you trust to deal with these financial matters on your behalf. Many people choose a trustworthy family member to take on such responsibilities, but you are not required to do so; just make sure it’s someone you can rely on to act in your best interest.

And while we’re on the subject of incapacitation, an advance healthcare directive should be put in place as well. This allows you to leave instructions regarding what type of medical care you want and also allows you to name a medical power of attorney to ensure that your treatment preferences are adhered to. These documents can easily be created along with your will; although the cost varies depending on the complexity, the price is usually very reasonable and well worth the peace of mind gained by knowing every decision made is your own.

Out of sight, out of mind

You would be amazed by how many people have no idea who they have listed as their beneficiaries. They most likely designated these people years and years ago and never gave it a second thought. You should always verify your listed beneficiaries upon life changing events (e.g., divorce, remarriage, death of spouse, etc.) and update them where necessary. The last thing you want is your ex-spouse laughing their way to the bank after you’re long gone because you forgot to revise your beneficiaries after the divorce.

In closing…

With the current Estate Tax in place ($5 million/person), the estates of very few individuals will be taxable; unfortunately, like all good things, this too will eventually come to an end so it is important that you remain aware of any changes that may have a direct effect on you.

For more in depth information about titling estate documents, please refer to our Q&A Series: Estate Planning under the Tax Relief Act of 2010 from June 13th. As always, we welcome the opportunity to meet with you personally to discuss any questions you may have regarding your individual estate plan.

Best regards,
Joe Rollins

Wednesday, September 21, 2011


From the Desk of Joe Rollins

The Federal Open Market Committee (FOMC) began their 2-day meeting today on interest rate policy. At the meeting’s close tomorrow, investors are anticipating Fed Chairman Ben Bernanke’s announcement of ‘Operation Twist Light,’ a plan wherein already low long-term interest rates would be decreased to an even lower level.


At last month’s FOMC meeting, most members supported additional policy measures to help encourage a stronger economy, even though Bernanke didn’t talk about the possibility of the Fed taking further action in his Jackson Hole speech last month. The market’s performance over the past month, however, has made it clear that the market expects the Fed to take some modest action, although it’s not demanding another full-on round of quantitative easing.

How would ‘Twist Light’ work? By increasing the timespan (longer maturities for the bonds) – but not the amount – of the securities held by the Fed (approximately $2.6 trillion). And unlike the full-fledged Operation Twist program instituted in 1961 that it was named after, the Fed wouldn’t be selling short-term securities to buy long-term debt. Rather, the Fed would “begin passively increasing [its portfolio’s] average maturity” by investing its available cash and reinvesting its longer-term mortgage-backed security proceeds.


The hope is that the extension of the Fed’s portfolio holdings would cause long-term interest rates to reduce, making it more desirable for companies to invest their stockpiles of cash. Theoretically, it would also allow for better borrowing terms and an increase in household spending while boosting employment and keeping prices from falling.

And what about the potential benefits to the market? Optimistically, Twist Light would help nudge investors away from deposits and riskless assets, taking the market higher. Even so, if the FOMC passes Twist Light – and it probably will, even with Philadelphia Fed President Plosser and Dallas Fed President Fisher expected to dissent – analysts generally aren’t counting on a huge impact to the market. Rather, rallies on both the upside and downside will likely continue through the end of the year.

The most important facet to Twist Light is that there would be no monetization plans (i.e., printing of new money). Unlike QE1 and QE2 wherein the Fed printed new money to purchase securities, none of that will take place in Twist Light. Since there’s no expansion of the monetary system and only an extension of the terms, I can’t see how it would hurt – and it might just help. The Fed certainly has my blessings to proceed.

Of course, with long-term yields already at low levels and with low borrower demand, there is some debate as to whether this action would really provide any economic benefits. After all, even worthy borrowers have thus far been uninterested in taking loans from banks that are sitting on hoards of cash. However, with unemployment continuing to hover at approximately 9% and with stalling growth, Twist Light seems to be a reasonable effort for the Fed to undertake.

Stay tuned to see what happens next…

Best regards,
Joe Rollins

Wednesday, September 14, 2011


From the Desk of Joe Rollins

Treating financial market volatility lightly is never my intention, but the current sell-off in the equity markets appears to be confusing to the average investor. My feeling is that things are not nearly as bad as they are being represented by the media, but undeniably, your account balances are going down almost daily. Undoubtedly, the wild swings in the equity markets are upsetting and confusing, especially to those who may not fully comprehend all the economic terms being used by the financial press. In this post, I’ll give you some background information to help you understand the economic impacts of the global sell-off.


The difference between a hockey mom and a pit bull? Lipstick.” That was one of the memorable quotes from Sarah Palin’s speech at the 2008 Republican National Convention. Shortly thereafter, Obama ridiculed McCain and Palin’s promises of change by stating, "You can put lipstick on a pig. It’s still a pig.”

What happened next? An uproar ensued with some insinuating that Obama is a sexist who called Palin a pig. He didn’t, of course, call Palin a pig; the “pig in lipstick” metaphor is fairly common and there are several examples of its use from decades ago.

Using this adage in the context of today’s financial woes, I would say that lipstick has been slapped on the pig that is our economy to make it more attractive. Is it working? And who is right – the bulls or the bears?


Last Friday, the equity markets sold-off over 300 points. Many have attributed that sell-off to the resignation of the European Central Bank’s chief economist, Jürgen Stark – the second German ECB official to jump ship in recent months over policy differences. Stark disagreed with the ECB’s increasing market interventions; he feels it is up to the Eurozone governments to bailout the distressed regions.

There’s almost no question that Greece will be forced to default on their obligations, and many publications have reported that it only has a few weeks of cash left in its budget. It’s also been reported that Greece has failed to meet the austerity goals it agreed to follow under the aid package. Even though Greece has significantly increased its taxes, there are very few people who actually do pay taxes in Greece. And so, increasing taxes on the few people who pay them may force them to leave the country, worsening the problem.

Additionally, Greece’s “cradle to grave” philosophy simply isn’t working. A majority of Greece’s citizens are government employees (directly or indirectly), although none of them have been laid off to this point. It seems apparent that the measures Greece is taking to close the budget shortfall are not enough. It’s no wonder that Germany is now unwilling to help Greece avert default.

This story is interesting, but it doesn’t explain the dramatic impact on the Dow Jones Industrial Average – a loss of almost $1 trillion in equity values in the U.S. financial markets on Friday alone. Many argue that Greece’s default would reportedly cause severe financial implications to the United States, but U.S. bankers have stated that they have little exposure to Greek sovereign debt. In addition, since this crisis has been ongoing for several years now, it’s unlikely that banks do not have credit insurance on these Greek obligations. As such, assuming that the U.S. financial banks would incur a huge hit from a default on Greek government bonds makes little sense.

Moreover, even if there were a default on Greek government bonds, it would not be a 100% loss. Presumably, the Greek government would be forced to abandon the euro and issue its own currency. Since Greece’s own currency would be highly inflated with “funny money,” the debts would be repaid with deflated Greek currency, almost ensuring that Greek government bondholders would suffer a loss. But by no stretch of the imagination would these losses be 100% of the bonds’ face value.

My point is that the U.S. banks have almost no exposure to Greek debt. And to the extent that they do have exposure to Greek debt, the banks almost assuredly have credit insurance against that debt. Finally, even if Greece were to default, it would certainly not be 100%. Therefore, I’m still baffled by the sell-off in the U.S. markets due to this situation.

Many have argued that the major European banks in France and Germany will become insolvent from to the situation concerning Greece. This argument is naïve, and it baffles me whenever I hear it reported in the financial press. So far, the ECB has purchased $75 billion worth of sovereign debt from various countries in the EU. This was done to stabilize the bonds of these countries, but it still hasn’t worked. The bonds have continued deteriorating and its yields have skyrocketed.

The analysts seem to forget that these European banks exist in the heart of Socialist economies. Neither Germany nor France is hesitant to invest money directly in their banking system in order to stabilize the banks. In fact, before 1980 almost every major bank in France was owned directly by its government, not the private sector. It would be much less expensive for these particular governments to invest money directly into their own banking systems rather than purchase the government bonds of a country with no financial controls such as Greece. To say that the reason the equity markets in the U.S. are going down is because the banks in Europe run the risk of insolvency is an uninformed statement.

The equity markets sell-off on Friday, September 2nd – which was attributed to the jobs report reflecting a net zero increase in employment – is also confusing. The financial press again failed to report all the pertinent information, which caused a volatile market response. For instance, 45,000 Verizon workers were on strike during August, and those workers were included in the unemployment figures. During September, these workers returned to work without a contract and will be counted as employed for this month. If you add-back these workers, the actual jobs report would have indicated a 45,000 increase in employment during August.

These employment levels certainly aren’t stellar, but they’re hardly as devastating as reflected by the performance of the equity markets. After all, it wasn’t that long ago that the employment reports were reflecting 400,000 to 600,000 negative jobs each month. The fact that the numbers have increased to zero should indicate that the economy – even if it’s not robust – isn’t worsening.

Time and time again I point out the excellent earnings of major U.S. corporations. Many reported this week that if the U.S. falls into recession, corporate earnings would be cut dramatically. But that statement doesn’t appear to be supported by the facts.

In reviewing the first quarter of 2011, the economy functioned at a less than robust 0.7% GDP. Basically, this represents a flat line on economic activity. However, the S&P Index of 500 Stocks reported record earnings during this muted GDP growth. Therefore, if you assume that the third quarter of 2011 GDP was essentially zero, then why has almost every analyst forecasted record profits during this same quarter?


The inconsistencies in the financial markets right now are overwhelming. Although it seems much worse, the S&P 500 is only down 7% for 2011 through Friday, September 9th, but is up over 20% for the last year. In long-term investing, a 7% decline should not be unexpected by investors; a true 20% movement in the market isn’t that unusual, so a 7% decline clearly isn’t that extraordinary. Due to the extraordinary volatility in the markets, it certainly feels like the losses should be significantly greater.

As of Friday, September 9th, the S&P 500 was at 1,155. Yesterday, a Bank of America/Merrill Lynch strategist, David Bianco, reconfirmed his year-end target for the S&P 500 at 1,400. This means Bianco expects the S&P 500 to increase 21% in the next 3½ months. He stated that the market has priced in an 80% chance of recession for 2011. Also, neither he nor I believe a recession is in the near future. Most investors would find it inconsistent that on the same day the financial media is reporting chaos in the financial markets and a worldwide sell-off, the chief market strategist for the largest brokerage house, Merrill Lynch, is actually reconfirming his year-end target of the S&P 500 being up 21% from the current level.

These are not the only inconsistencies being reported by the media today. Ironically, almost all states are currently reporting higher revenues from sales tax, state income taxes and other income sources. It is illogical to assume that sales tax revenues would increase without corresponding sales increases. The Federal government is also reporting higher payroll tax receipts in 2011. If employees weren’t earning more, then payroll taxes wouldn’t be increasing.

In August, the Department of Commerce reported a large increase in U.S. exports. This can only mean that U.S. manufacturing is increasing, reflecting that U.S. exports is one of the bright stars in our economy in recent months. This can mainly be attributed to the lower dollar and the higher efficiency of the U.S. worker. For instance, German automobile manufacturer, Daimler AG (maker of Mercedes-Benz), is producing cars in South Carolina that are being exported around the world.

As I’ve indicated in prior posts, analysts are projecting that the earnings for the S&P 500 for 2011 will be approximately $100/share. Even if the analysts are off by 10% and earnings are only $90/share, given a conservative multiple of 15, the S&P 500 would have a current valuation of 1,350. Given the S&P’s current level of 1,155, then that index would be undervalued by 17%. With the low yields on U.S. Treasury bonds at 1.9% today for the 10-year bond, a multiple of 15 is quite conservative. Furthermore, even though the markets continue selling off, valuations are more than fair – and perhaps even undervalued – at the current time.

There’s also been a drastic movement in the bond market. As I mentioned above, the 10-year Treasury bond sells today for 1.9% even though inflation is forecasted to be close to 2% in the coming decade. It’s difficult to imagine why any knowledgeable investor would buy a Treasury bond that would most assuredly lose money in purchasing power over the next decade. Unfortunately, many seem to have done so.

The financial media is reporting that the U.S. is falling into a serious recession. Meanwhile, the National Association for Business Economics slashed their potential growth forecast for 2011 and 2012 this week. These economists are forecasting that the economy will grow at 1.7% for 2011 and at 2.3% for 2012. While the media talks about a recession, NABE economists are talking about reasonable growth over the next two years. Should investment decisions be based on what the financial media reports or on projections from economic experts?


Clients have asked me to comment on President Obama’s new jobs plan and the potential for QE3 by the Federal Reserve. While the jobs plan will help GDP growth some, it’s hard to imagine that it would help enough to offset another half trillion dollars in debt. If Congress approves this plan, we should expect some GDP growth in 2012 from this bill. Hopefully the growth will be enough to offset the additional money that will need to be borrowed to finance the plan. Regardless of what the president says about the plan being fully paid for, it will clearly be an outflow of cash in 2012 and an inflow of cash in some later year. In other words, it may be paid for, but not in the same fiscal year it’s spent.

Last Thursday night, President Obama gave his speech on his American Jobs Act plan. In it, he indicated that everything in his proposal has been supported by both Democrats and Republicans. Yesterday, Obama outlined how the $447 billion jobs bill would be paid for – by various tax increases that have been systematically turned down by Congress a number of times over the last three years, even when Democrats controlled both the House and the Senate.

Frankly, I don’t understand why President Obama’s solution is to increase taxes. I find it even more distressing that while the money would be spent in 2012, the tax changes would not go into effect until January, 2013 – two months after the November, 2012 presidential election.

As for QE3, the most recent proposal is that the Fed will sell some of their short-term Treasury bonds and buy longer term Treasury bonds. It would take another post to explain the rationale for this approach, but my opinion is that QE3 wouldn’t hurt. Why? Because the Fed wouldn’t be printing any new money or expanding their balance sheet; rather, they’d be selling some items on their balance sheet and buying others. I can’t imagine this having a negative effect, and therefore, bring on QE3!

I recognize that these news items are inconsistent with the stock market’s continuing decline, and frankly, that’s the reason our firm isn’t selling. Instead, I’m holding out for sanity to return to the markets. With the volatility in Europe and the constant fear of a recession in the U.S., I don’t expect the wild swings in the market to stop anytime soon, but I still believe that the markets will eventually increase. In my opinion, 2011 will still reflect double-digit positive numbers when all is said and done.

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

Best regards,
Joe Rollins