Happy Holidays from Our Family to Yours!

Wishing you the joy of family, the gift of friends, and the best of everything in 2014!

"He was chubby and plump, a right jolly old elf,
And I laughed when I saw him, in spite of myself!
A wink of his eye and a twist of his head,
Soon gave me to know I had nothing to dread." Clement C. Moore
(Ava, on the other hand, was terrified!)

In celebration of the Christmas holiday, our office will be closed on Tuesday, December 24th and Wednesday, December 25th. Our regular office hours will resume on Thursday, December 26th.
AND, in celebration of the New Year holiday, our office will be closed on Tuesday, December 31st and Wednesday, January 1st. Our regular office hours will resume on Thursday, January 2nd.

If you have a matter that requires immediate attention when our office is closed, please contact me at jrollins@rollinsfinancial.com. You can also contact Eddie Wilcox at ewilcox@rollinsfinancial.com or Robby Schultz at rschultz@rollinsfinancial.com.

May your holiday season be filled with peace, joy and laughter!

Warm regards,
Joe Rollins

Let the Good Times Roll

From the Desk of Joe Rollins

November has come to a close, and it too proved to be another excellent investment month. 2013 is shaping up to be one of the best investment years in a decade. Aside from all of the constant negative talk about the market and its potential for loss, it has proven to be quite an extraordinary year.

For the month of November, gains were added on top of an already very profitable year. During the month of November, the Standard & Poor’s 500 had a total return of 3.1%, while the NASDAQ Composite and the Dow Jones Industrial Average had an excellent return of 3.7% for the month and the Russell 2000 Small-Cap index gained 4.1% for the month. Through the end of November 2013, the S&P 500 is up 29.1%, the NASDAQ Composite 36%, the Dow Jones 25.5%, and the Russell 2000 is up an astonishing 36.2%. In contrast to those impressive returns, the Barclay’s Aggregate Bond Fund has suffered a 1.7% loss for the year thus far.

November was consistent with the many positive months of 2013. Virtually all of the domestic stock funds were up from 2-4% for the month, while most of the international funds were either down or only marginally profitable. Bond funds, for the most part, were down for the entire month except for the high-yield bond funds which were marginally profitable during November. Like so many months before, the municipal bond funds continued to lose money during November and, for all practical purposes, every municipal bond fund is down for the year.

I am asked almost daily when I think the market will implode, or more specifically if I think that we are in a stock market bubble. If, in fact, we are in a bubble, it is one of the most unusual ones of all time. The market has gone practically straight up since 2009, yet stocks continue to be fairly reasonably priced. I find no extraordinary divergence between fair value and the current trading on the stock market.

One of the reasons why the market continues to be fairly priced is because interest rates are extraordinarily low. Every time I hear someone compare the current stock market to a period from a prior year, I always ask them to compare valuations with current interest rates. We receive a call almost daily from a prospective investor, trying to beat the yields on a money market account CD. If you have not figured it out by now, the reason there are such meager interest rates is because the Federal Reserve wants them to be that way.

It is fairly clear that the actions of the Federal Reserve are designed to inflate asset values. When you inflate asset values, you create a wealth effect wherein people feel comfortable spending their money on items such as new cars, homes, and other capital assets. One way to accomplish this is to make interest rates so unappealing that people begin to seek other ways to earn higher rates of return. For the last 18 months the Federal Reserve has consciously moved to keep interest rates low. They have succeeded in forcing cash out of people’s savings accounts and into other assets. This has also accomplished their goal of moving real estate to firmer ground while appreciating the real estate and equity markets, which is the exact end result that the Federal Reserve desires.

The perception by some that the stock market is too risky at the current time continues to baffle me. If you look over the last 20 years, there certainly have been periods of time when the market suffered losses, both big and small. In 1994, the market was marginally lower, losing less than 2%. And of course, we all remember the 2000-2002 losses that occurred after the NASDAQ Composite run-up in the dot.com rally. The stock market lost money in 2000, 2001, and 2002, and made a very dramatic move to the downside. Not long after that, in 2008, the market suffered one of its worst losses of all time, losing 37% in one year. Consequently over the past 20 years, the market lost money in five of those years, or 25% of the time. While that 37% loss in 2008 seems to be etched in everyone’s mind, they seem to forget that since then, the market, beginning with 2009, has increased yearly by the following percentages - 26, 15, 2, 16 and now 29%. Despite five years of losses in the past 20 years, the market still has an annualized return of 8.2%. If you consider that your money market account is currently earning zero and the market is returning 8.2%, it makes you question why anyone would keep money in cash these days.

Although virtually everyone reading this blog has cash available in money market accounts, they tend to only invest money annually or even less often and usually in large blocks. This limited investment strategy has proven to be unsuccessful. A significant amount of money could be made by investing monthly, which is referred to as Dollar-Cost Averaging. Made easy by electronic transfers from your individual checking account or money market account, your money could easily be put to work in a market that is earning handsome returns as opposed to earning virtually zero while sitting in cash.

While certainly nobody knows what the month of December holds from an investment standpoint, historically it has been a very good month. We have not had a negative December since 2007 and it is highly unlikely that we will see one in 2013. As previously mentioned, the period of time from November through April has historically been the most profitable time for investing in stocks because a lot of the money invested in pensions, IRAs, and other type of retirement accounts are invested during this period. If you have money that is not invested, now would be the time to take advantage of this excellent market. Additionally, we are quickly approaching January which would be a great time to make your IRA contributions for 2014.

Please feel free to give us a call to set up an appointment to discuss new ways that you can begin to save more and invest in enterprise by participating in the stock market.

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

Best regards,
Joe Rollins

48 Hours in The Big Apple

As I am positive that you must be tired of me constantly writing about economics and the stock market, I vow to write nothing of the two in today’s blog. You may rest assured though that we are watching the market closely as it continues to move higher. By any definition, this has been an extraordinary year but, as promised, I will not discuss that today.

Last weekend, I attended what was to be your typical stock market seminar in New York, sponsored by a nationally known mutual fund company. Since I love New York but can only handle a few days there at a time, I thought I would make a quick trip up and back to attend this conference. One of my great loves has always been The Broadway Theatre. As a child, I was lucky enough to actually see Mary Martin in “South Pacific” on Broadway, and have been a huge fan of Broadway musicals ever since. I have seen so many and although most of them are just light-hearted entertainment, I have been lucky enough to see some of the great ones. For me, no trip to New York is complete without seeing at least one show.

I arrived at LaGuardia Airport around 3:00 p.m. on Thursday and had just enough time to get to the hotel, unpack, and get to the theatre to see the newly debuted “Motown The Musical”. Going in, I really did not know much about this show but because I have loved Motown music since high school, I knew I had to see it. Buying a ticket from a scalper, I was fortunate enough to end up in the very first row and able to hear the singers perform without amplification. It was quite an amazing show and I highly recommend it.

I cannot tell you how many memories this show brought back for me. To hear the music of The Temptations, The Four Tops, Smokey Robinson, Stevie Wonder and Marvin Gaye was quite a welcomed blast from the past. And to witness the house almost come down when Michael Jackson and The Jackson 5 sang along with the Supremes was quite a sight to see. While I found the script a tad weak and mostly uninspiring, the music alone made up for this lack of substance as I found myself singing and dancing in my seat in no time.

Early the next morning, I attended the seminar, which incidentally was held in the Metropolitan Opera House in New York City. Anyone who knows me understands that attending an event such as this is the only way you’ll ever find me at the Met. But as much as I do not like the opera, the significance of the venue was not lost on me. Even sitting in the 5th balcony was very special.

As expected, the seminar was as interesting as can be when listening to presidents speak about their companies. After the morning break there was entertainment scheduled, although the performers were not revealed to us ahead of time. Believe it or not, over the next couple of hours I saw two incredible singers. The first was Katharine McPhee, who you may know as a runner-up on American Idol who later went on to star in the TV series “Smash”. As I expected, she was quite extraordinary. Next up was Melissa Etheridge and her band. Melissa of course has had a number of hits and was quite entertaining as well. The biggest highlight for me though was getting to personally meet both of these talented performers. I can assure you from the hug I received that Katharine McPhee, who is about 5’8”, desperately needs to eat a cheeseburger.

This seminar has always been known for its special late afternoon entertainment, and since Celine Dion and her full orchestra performed last year, I knew I would not be disappointed. And boy was I right! After a few more hours of discussing stocks and bonds, the surprise musical guest was finally revealed. Unbelievably, they paraded out Barbra Streisand and her entire orchestra.

A few years ago, tickets to see her on tour were approximately $1,500 each, so to think I would ever see Barbra Streisand perform for FREE was a dream I never could have imagined. Although I may not agree with her politics and find her to be painfully outspoken, there are few, if any, performers that can match her talent. To actually see Barbra Streisand in the Metropolitan Opera House was an event that I will never forget – and did I mention it was free?

After the event was over, I hustled back down to Broadway again in time to see “Jersey Boys” from the fourth row. This was actually the tenth time I have seen “Jersey Boys” – four times in Las Vegas, three times in Atlanta, and now three times in New York. For those around my age, the music is just as good and relatable as “Motown the Musical” but the storyline in “Jersey Boys” is much, much better. And believe me, there is no bigger thrill than witnessing the actor playing Frankie Valli sing “Can’t Take My Eyes Off Of You”. Even though I had already seen the show nine times, I was again completely amazed by the cast, the characters, and the overwhelming talent. I have seen a lot of live performances over the years and in my opinion you won’t see any greater talent than on the Broadway stage, especially in New York.

I was lucky enough to see the Phantom of the Opera when it first opened on Broadway in 1990 and I will never forget sitting in the audience when Michael Crawford and Sarah Brightman actually shook the theatre with their incredible voices. Although the theatres are small in New York, the floors uneven, the bathrooms inadequate, and virtually everything about the district old and decayed, the uniqueness of sitting in this 500 seat theatre should be experienced by all. You will never see such talent so up close and personal anywhere else in the world.

As to not waste a single minute, I got up early on Saturday morning and was at the Metropolitan Museum of Art when it opened. I never tire of walking through the Impressionism collection at the Met Museum. I am a big admirer of Renoir and am always amazed by how vibrant and beautiful the colors of these paintings still are after 125 years. I was also fortunate enough to check out some of the other great artists like Rembrandt and Van Gogh. However, to me, nothing compares to the revolutionary impact of the Impressionists. I often think to myself, why don’t we have any artists like Renoir or Monet today? Perhaps we do, and we’ll just have to wait 100 years to find out who they are.

As I took a cab directly from the Metropolitan Museum of Art to LaGuardia for my 3:00 p.m. return flight, I realized I had been in New York for exactly 48 hours and not a minute was wasted during that brief but unbelievable time. Although culture and my name are rarely (actually never) used in the same sentence, this weekend was quite extraordinary, by any definition.

While none of the above has anything to do with economics, the stock market, or even taxation, I just thought you may be interested in hearing of a weekend that would rival even that of the rich and the famous. While I do not fall into that category yet, it sure felt like it for 48 hours!

Best regards,

Joe Rollins

I Do Not Like Green Eggs and Ham

From the Desk of Joe Rollins

I have intentionally not published a blog since the recent issues surrounding the 2014 fiscal budget and the expansion of the National Debt. I thought it better to wait until the issues were sorted out before I commented on the state of the financial markets. I couldn’t resist using the above title to this blog as it was so reflective of the dramatic (and stupid) demonstration by Senator Ted Cruz, from the great state of Texas, when he attempted unsuccessfully to filibuster the Senate regarding defunding Obamacare. I certainly intend to cover this as well as the importance of the equity markets during the month of September and the first half of October in this blog. However, first, there are other matters I came across recently that I wanted to share with you.

By chance, I happened to catch an HBO special titled “Muhammad Ali’s Greatest Fight”. Assuming that the show was a documentary about or tribute to one of the great Muhammad Ali’s boxing matches, I tuned in. Quite interestingly, and to my surprise, the special focused on the Supreme Court case of Muhammad Ali, in 1971, and his application for deferment from the Vietnam draft, citing his conscientious objector status on religious grounds against any type of war. We all know that the case ended in Muhammad Ali’s favor, but the politics behind the decision and the connection to the Supreme Court were extraordinarily interesting to me. This case clearly demonstrated that in many instances, the Supreme Court decides many cases not on judicial or legal precedent, but on personal feelings, political bias, or fear of reprisal by the general public. Therefore, it should not go unnoticed that Ali did not win on the merits of the case, but due to a technicality.

Personally, I had not been aware that so much political activity influences the Supreme Court. So, determined to get a better understanding on the matter in order to speak more intelligently on the subject, I noted that much of the HBO show was primarily based upon a 1979 book written by Bob Woodward and Scott Armstrong, titled The Brethren. And, although only about 15 pages in the book were dedicated to this particular case, I found the entire book overwhelmingly interesting. It described the conservative nature of the courts in the 1970’s and the personal idiosyncrasies of the particular justices during that time. I found the book to read completely unbiased toward a specific political agenda, rather simply discussing each case and the background of each decision. It later surfaced after his death that Justice Potter Stewart was actually the inside source of information for the book, since Justice Stewart so highly respected Bob Woodward for his reporting on the Watergate and President Nixon scandals.

In order to become further knowledgeable on the subject, I read another book titled, The Nine, by Jeffrey Toobin. This book, written more recently in 2008, also addressed cases and decisions of the Supreme Court, but at a later time when the Supreme Court was migrating from their once conservative roots to a more liberal bias. I found this book also to be interesting and well-written, however, unlike “The Brethren,” it clearly exhibited a liberal bias which appeared to taint its writer. Despite this bias, the book did an excellent job of illustrating the inner-working of the Supreme Court system.

Finally, I read a third book, written by Howard L. Bingham and Max Wallace in 2000, on which the HBO special, Muhammad Ali’s Greatest Fight, was based. Different from the other books, this particular novel chronicled Muhammad Ali’s life from childhood through the time he was involved in this particular case. While very little emphasis was given to the mechanisms of the Supreme Court, the book focused on Muhammad Ali, his feelings and the influence the case and its decision had on the boxer himself.

I bring this up, not because it has any relevance on economics, the stock market or investing, but as an aside to the political environment and the external pressures on the justices in the Supreme Court. I find that by understanding some of the history and the background behind our court’s major decisions and the magnitude by which these decisions can be impacted by politics, it can shed some light on some of the more current events of our political and judicial systems. I highly recommend these books if you are interested in reading about some of the most influential and important Supreme Court cases and the reasoning behind those case decisions.

I promised you in earlier blogs that when Congress discussed the extension of the federal debt limit there would be high volatility in the markets during early October. These predictions were accurate in early October when this occurred in Washington D.C. The President and the two bodies of Congress reminded me of the way children act on a middle school playground, albeit a political arena; among all of the discussions, there was a lot of political fluster, accusations, misinformation, and at the end of the day nothing really happened. Thus, the reason behind why I typically advise investors to ignore the happenings in Washington; over the last 15 years or so, it appears that Congress has little or no effect on the equity markets over the long term financial picture. Unquestionably there are short term variations and volatility, but over the course of time, the economy controls the movement of equity markets, not politics.

Since little was accomplished regarding the budget and the extension of the debt, there will now be a new deadline for action by Congress of late January or early February, 2014. So once again, early next year you can expect the same volatility, and most likely the same Congressional outcomes, experienced in October. The only saving grace to us as Americans and investors is if this happens, and Congress fails to do anything in early 2014, the sequester will kick in once again and Congress will be forced to reduce expenditures. It has recently been revealed that over the last two years the federal government has spent less money in each respective “new year” than the previous year. This is the first time that a spending reduction has occurred in subsequent years since the Korean War. Although I am convinced that given the opportunity, spending by both the President and members of Congress would exceed all budgetary limitations, we can be thankful that they can be forced to reduce expenditures under the sequester limitations.

Although Congress was able to shut down the government for a few weeks after that embarrassing rendition of Green Eggs and Ham, even that seemingly simple act was screwed up by their ineptness. After the shutdown was over, it was announced that all government employees would receive back-pay for their time off during the furlough and many of those that received unemployment during that time would not be required to pay it back. So basically all that Congress did was provide a two week paid vacation for all government employees as well as an additional kicker of extra compensation. If this is any prediction of how Obamacare will be run then we’re really in trouble, as once again it is has been illustrated that the government does absolutely nothing well.

The markets, however, have been nothing short of extraordinary in 2013. As I write this posting on October 22, 2013, the S&P 500 is up 24.42% for the year. The markets held strong for the month of September, a typically very weak month. The S&P 500 was up 3.1%, the NASDAQ composite was up 5.1%, and the DOW Jones industrial average was up 2.3%. Even more unusual, we are deep into the month of October and the markets are trending even higher at this point.

Also during the month of September, bond performance resulted in some minor gains and international funds earned decent returns thereby making a historically weak performing month a truly unique one. Due to almost assuredly higher interest rates, I do not anticipate these bond gains to be sustainable in the future although I continue to be encouraged that equity markets will continue to rise over the next few months.

In summary, I could write a long dissertation on the progress of the United States economy, but it is sufficient at this point to say things are improving; residential construction is operating at full capacity, employment is marginally up, corporate America is generating profits at record levels, and interest rates continue to remain very low. Although certainly not roaring, the economy continues to make progress and American investors continue to earn welcomed returns.

We are approaching the historically strongest time for equity market performance. Between November and April, the equity markets have historically returned the majority of their profits. I look forward to this investment time and can only hope that the upcoming periods add to the positive investment results we have already experienced during 2013.

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

Best regards,
Joe Rollins

Say Goodbye to Summer...

From the Desk of Joe Rollins

It’s hard to believe that September is already here; summer came and went in the blink of an eye, without a whole lot of sunshine. I don’t recall playing a single round of golf the past few months that wasn’t on soggy ground. Despite the rain, it was a pretty eventful summer for me and my family.

In August, my son, Josh, began his first week as a freshman at Auburn University then shortly after, my daughter, Ava, began her first week at Peachtree Presbyterian Preschool as a 2 year old. Poor Ava just cannot grasp the fact that although she and Josh both go to school, they do not attend the same one and cannot ride a school bus together. I guess this concept will take a little while for her to understand, which is fine by us as this show of innocence is just another one of her endearing qualities.

Josh's first day

Ava's first day
In addition to the start of a new school year for my children, August also brought my 64th birthday as well as having owned my own company for literally half my life. When I began this firm in my living room in 1981, I really didn’t know what the future would hold. I felt relatively sure I could get a few clients, but figured if all else failed I would just go back and work for another CPA firm. Thirty-two years later we are still growing every day, adding new clients located throughout the United States and even overseas. Despite my optimism, I truly never believed I would still be at it more than three decades later. It has been an amazing run but I’m not even close to the finish line.

People ask me all the time when I intend to retire, and my response is easy and simple - possibly one day, but definitely not right now! When my daughter is 18 years old, I will be the ripe old age of 80, so most likely they will have to carry me out from behind, or under, my desk.

But now let’s move on to more important matters. While virtually all financial assets were down for the month of August, we still managed to have an extraordinarily good first eight months of 2013. The Standard & Poor’s 500 index (S&P 500) of stocks was down 2.9% for the month of August, yet it is still up a sterling 16.2% through August 31, 2013. The NASDAQ has been the best performer for this year, up 19.9%, despite being down 0.9% for August. The Dow Jones Industrial Average was also down 4.2% for August, yet continues to be up 14.9% for 2013.

It really did not matter what you were investing your money in during August, essentially everything was down. Almost all international equity funds were down similarly to the U.S. markets. Even bond funds were down for the month. I cannot help but think that people panicked at the mention of potential military conflict in Syria and began selling financial assets, whether stocks, bonds, or otherwise. This is just another example of how the uninformed often react spontaneously.

As I have discussed in these blogs so many times before, we are investors, not traders. Whatever happens in Syria is not likely to have a long-term effect on the financial markets or corporate profitability. Since Syria produces very little oil, the logic for the oil prices skyrocketing is ridiculous. While it’s perfectly possible that the conflict in Syria could spread to other countries, it is highly unlikely given the scope of the engagement being considered. After all, we have already told them when and where we will be firing off what is sure to be some of our old, outdated missiles and have also informed the citizens of the country to avoid the area where they may land. Therefore, this most likely will not become a financial issue worth considering.

In October, we are expecting the next fight on the extension of the federal debt limit. We could all debate this for months on end, but the truth of the matter is that at the end of the day they will extend the federal debt. While the markets may be volatile during these discussions, you may rest assured that in the end an extension will be in order. It seems like more than ever the players in Washington want to have their five minutes in the spotlight, and this gives them a perfect opportunity to do so. There will be some horse-trading that occurs behind the scenes, but at the end of the day it will have no long-term investing implications for us, thus giving us no reason to trade around this event.

So where do we stand going into the last four months of 2013? I have reviewed all of the economic data and now believe the S&P 500 will end the year at around 1750. As of September 3, 2013 it was 1634. If we were to in fact reach that level, the S&P, including dividends, would be up an outstanding 20% for the year 2013. I have looked at a lot of data and feel comfortable with the notion that we will be somewhere in high double digits rather than the low double digits that I previously projected.

What gives me this level of comfort is that it looks like the S&P earnings for 2014 will be roughly $120 per share. If you give those earnings a reasonable multiple of 15, the S&P should be trading at 1800 during 2014. Since the market tends to forecast the future rather than reflect the past, a 1750 year-end balance would be a reasonable estimate of the market going forward. All of these numbers appear to be seasonable and therefore illustrate that the market is not over-valued at the current time.

In May of 2013, the Federal Reserve made an announcement that they would begin tapering their purchases of bonds before the end of 2013. At the time of their announcement, the ten-year Treasury bond was selling at 1.6%. Today, the ten-year Treasury bond yield is selling at almost 2.9%, having almost doubled in the last four months. Such a move in interest rates is almost without parallel. As a result of the skyrocketing interest rates, virtually all bonds are trading negatively for the year. In most years, bonds are a nice addition to stocks in that they take the volatility out of the market and reduce risk. Unfortunately, this has not been the case in 2013.

The "Fed Model," which is a formula for a fair stock market valuation often attributed to Alan Greenspan, is calculated by taking next year’s S&P earnings and dividing them by the ten-year Treasury interest rate. Currently, next year’s earnings are considered to be $120 divided by 2.9% which would reflect a current valuation of 4137. As previously mentioned, the S&P is currently at 1634. Therefore, interest rates would need to be over 6% to justify this level of the S&P.

That analysis indicates that either the market is grossly undervalued or that interest rates are way too low; at the current time it appears that interest rates continue to be too low signifying that the market is not being undervalued. My suspicion is that interest rates will continue to go up for the remainder of 2013, resulting in a negative rate of return for bonds. Every time I mention interest rates, I like to remind people that in October of 2008, the ten-year Treasury bond was at 4%. That was considered to be the beginning of the financial crisis, and five years later interest rates have not approached anywhere close to that level.

From a true economic standpoint, the status quo continues to be constant. The GDP was updated recently for the third quarter up to 2.5 from 1.7. While certainly not tremendous GDP growth, it’s still a long way from negative. As employment improves and housing stabilizes, the economy continues to show a slow but steady increase leading me to believe that none of the economic circumstances we are seeing today will alter my forecast for the end-of-the-year stock market levels.

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

Best regards,
Joe Rollins

Markets Update – Stock Market Continues to Trend Higher

From the Desk of Joe Rollins

July 2013 was another excellent month for the stock market. The S&P 500 was up 5.1% for July and 19.6% for the year-to-date; the Dow Jones Industrial Average was up 4.1% for the month and 19.9% for the year-to-date; and the NASDAQ Composite was up 6.6% and 20.9% for the year-to-date. During July, the Dow and the S&P both reached record levels while the NASDAQ reached its highest level in more than 12 years. Succinctly, if you were invested in the U.S. stock market during July, you likely would have earned more money in one month than a five-year CD pays an investor during the entire five-year period.

From an investing standpoint, July was an interesting month. For the first time in quite a while, the stock-pickers outperformed the index funds. Many of the actively managed portfolios exceeded the indexes by one to two full percentage points.

For the first time in many months, the international funds actually showed some positive returns. For example, European funds are starting to show positive returns along with Japan. As everyone has probably heard, Japan is trying to stimulate its economy and is basically committing all of its central government’s resources to contribute to increasing growth. Japan has basically been in a recession for the last 25 years and they have agreed to release all necessary federal stimuli to improve the economy. Personally, I’m not a believer in the Japanese way of doing things, and therefore, I don’t pursue Japanese investments.

Meanwhile, Europe is showing some early signs of improvement, but they’re a long way from being out of the woods from a financial standpoint. Until they figure out a way to stimulate the private business sector in Europe, they just cannot grow. Basically, almost all of the international funds are underperforming compared to the U.S. stock market, which is one of the best in the world.

For the month of July, bond funds showed a miniscule return and nearly all taxable and municipal bond funds are showing serious year-to-date losses. The only bond funds that are showing some life are the high yield bond funds, which actually had a decent return during July and at least have small positive returns year-to-date. However, with the high likelihood that interest rates will be going up in the coming months, bond funds may well continue to be a challenging asset class for investors.

Stock market returns this year have been nothing short of outstanding, and almost no one – including me – could have projected that the S&P would be up almost 20% in a little over half the investing year. At the beginning of the year, I projected that 2013 would end with low double-digit returns. Although things could certainly change between now and the end of the year, my projection has already been surpassed. Naturally, I’m often asked what to expect for the rest of the year considering the high returns we’ve realized thus far. Here’s my answer:

September is notoriously a difficult month for investors. Added to that month’s normal seasonal negative behavior in the market is the anticipation that the Fed will cut back on its bond purchasing program. For those reasons, I certainly expect for volatility to increase over the next 60 days. However, I don’t see the major markets totally unwinding. As long as there are no better alternatives to stocks, I expect the market – even if volatility is an issue – to trend higher.

There’s presently a great rotation occurring out of cash and bonds and into U.S. equities. In fact, bond funds are seeing record withdrawals with the vast majority of that money ending up in U.S. equities. With money market accounts paying zero and CDs paying only marginally higher, these types of investments will guarantee a loss of purchasing power over time unless, of course, there is no inflation.

Practically the only investment currently returning real returns over the rate of inflation is U.S. equities. Volatility will continue to be evident until other investments stabilize, but it is our intention to be principally invested in high quality U.S. equities.

I believe the final investment returns for the 2013 year will be fairly close to where they are presently. If 2013 ends with a 20% return, we would all agree that it was a very satisfactory investment year. Nevertheless, I’m not willing to cash in our chips today because I may be as wrong about this as I was about the low double-digit returns I forecasted at the beginning of the year. I have no reason to believe that the market will be lower at the end of the year than it is today, but I’m unwilling to get out because we need to participate when the market moves up.

A while ago, I read a book by Peter Lynch, the famous Magellan Fund manager during its heyday from 1977 through 1990. Lynch’s investing philosophy is to stay invested at all times regardless of economic circumstances, and he famously pointed out that "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

As that remark pertains to this particular year, I believe it is wise to follow Lynch’s sound advice. As such, we will stay invested, even if there is a correction on the horizon.

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

Best regards,
Joe Rollins

While You Were Barbecuing...

From the Desk of Joe Rollins

We hope that all of you have found time to enjoy a little R&R over these summer months. Unfortunately, here in Atlanta, it has rained virtually every day and is now being referred to as the “Seattle of the South.” Although the rain may be refreshing every now and then, I would prefer that the golf courses actually have the opportunity to dry out at least once this summer.

Many of you may not have noticed that on Friday, July 19, 2013 the S&P was up an astonishing 20% for the year. What is even more remarkable is that index is up a full 6.2% for the month of July alone, which only included 14 trading days. For the 12 months ended July 19, 2013, the S&P is up 25.71%, the Dow Jones Industrial Average is up 23.32%, and the NASDAQ Composite is up 20.96%.

A good indicator of a strong market is that the smaller cap stocks are actually outperforming the large-cap stocks. The S&P Mid-Cap 400 Index is up 31.92% for the 12 months ended last Friday, July 19, 2013, and the Russell 200 Small-Cap Stock Index is up most amazingly 32.86%.

Needless to say, no one can predict what will happen for the rest of the year, but we need to be thankful for how well the market has performed thus far. As much as I hate to interrupt your summer fun, I found it impossible to let such an important occurrence pass by without recognition. As these markets go up, you are building wealth to help ensure that your retirement years will be sound and secure.

Given the aforementioned numbers, I can’t help but wonder how the investors that decided to keep their money in cash feel about that decision now. From an investment standpoint, a phrase I hear more than any other is, “I do not want to invest until the market comes down.” By virtue of waiting, you have missed a run of over 25% for the last 12 month period. Those potential investors that have been sitting on cash, money markets, or CDs have missed out on a great opportunity to accumulate wealth.

We would love the opportunity to sit down with you and discuss how to best utilize your uninvested cash in order to prepare for your future investment needs. While certainly everyone is anxious about investing cash in a market that has already gone up a great deal, the opportunity to invest in dividend stocks or other types of investments may calm your jittery nerves.

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

Best regards,
Joe Rollins

Taper Tantrum

From the Desk of Joe Rollins

I have some very good results to report as we move into the second half of 2013. That being said, the quarter was very volatile and we must analyze the negatives along with the positives in order to obtain a full understanding of everything that happened during the quarter. Nevertheless, the results were quite impressive.

While almost all of the financial markets posted negative results for the month of June, the second quarter results and the results for the first six months of 2013 were excellent. For the quarter ended June 30, 2013, the S&P Index of 500 Stocks had a return of 2.9%. For the year, that index recorded a return of 13.8%. The Dow Jones Industrial Average was up 3% for the quarter and 13.3% for the first six months of the year. The NASDAQ Composite was up 4.5% for the quarter – the best return of the indices – and its return for the first six months was 13.4%. The Russell 2000 small-cap index was up 3% for the quarter and its return for the first half of 2013 was 15.8%.

The first half of 2013 was the best first half of a year for the financial markets since 1999. As you may recall, the S&P 500 wound being up an amazing 21% for the 1999 year. We can only hope for a return of 21% for 2013, although that’s not likely to happen. Although none of us can forecast exactly what will happen for the rest of the year, we must concede that the first half was quite remarkable.

The real story during the first half of 2013 was the absolute turmoil in the bond market. For the second quarter of 2013, the Barclays Aggregate Bond Index was down 2.6%, and coincidentally, the Barclays was also down 2.6% for the first six months of 2013; for the last year, it’s lost 1.1%. It’s very unusual to see the bond market take such a big hit over such a short period of time.

Investors buy bonds expecting to not get much upward appreciation and instead look for stability and the small coupon that bonds pay. Rarely, however, do bonds take such a big hit when the other financial instruments are doing well. This supports our philosophy for diversification. No one can tell exactly what the future will bring, and I certainly wasn’t one who forecasted bonds taking such a big during this three-month period.

For the quarter ended June 30, 2013, the U.S. equity markets were the only safe haven. Almost all of the international funds traded on the downside except the Japanese-related funds, and the emerging markets were particularly hard-hit. Likewise, nearly all high quality bonds had a negative return for the 2nd quarter; even the low quality high yield bonds were negative in the 2nd quarter – although some etched out a small profit for the six-months ended. Most surprising to me was the municipal bond market, which took a tremendous hit this quarter; almost all municipal bonds traded negative for the six-months ended June 30, 2013. Undeniably, this has been a very unusual year so far.

As I have discussed before, the Fed has been purchasing $85 billion in bonds per month in an effort to keep interest rates low and encourage improvement in the housing market. In many respects, they have succeeded with the housing market rebounding in the United States with extraordinarily low interest rates. On June 19, 2013, Fed Chairman Bernanke indicated that if the economy continued to improve, the Fed would start “tapering” their purchases of these bonds later this fall.

Almost immediately, the equity and bond markets suffered an extraordinary loss: the DJIA lost over 700 points in less than a week’s trading time; the 10-year Treasury spiked from 2.2% to 2.6% almost overnight; and 30-year mortgages jumped from less than 4% to the mid-4% level almost overnight. Why did these significant moves occur over such a short period of time for what, in my opinion, wasn’t unexpected news from Bernanke?

You must ignore almost everything you know about investing to understand speculation. The hedge fund industry – a huge investor in the U.S. equity markets – must work on the margin to be successful. They have proven that they cannot invest money any better than a top quality mutual fund. Therefore, the only way they can succeed and bring value to their investors is to push the envelope. When the market is down, they can improve their returns by forcing it down even further. When it’s on the upside, they have to get an advantage either by borrowing money and investing it or finding some niche in the market they can exploit.

Since interest rates have been next to zero for several years, hedge funds have made a ton by borrowing money at a very low rate to buy high yield bonds and reporting the difference. This is fairly easy when you can borrow at one and invest at six, and earn a rate of return for the difference. However, that advantage also comes with immediate risk.

If interest rates were to suddenly increase, you would suffer losses on the debt and investment sides since you have leveraged the investment. This could be catastrophic for a highly leveraged hedge fund if interest rates were to move quickly. When Bernanke announced the Fed would likely begin tapering their purchases, the hedge funds had a “taper tantrum.” Anticipating that interest rates would invariably go up, the hedge funds suffered an immediate liquidation of close to $80 billion in high yield bonds almost overnight. This mass liquidation of bonds created havoc in the equity and bond markets over a relatively short period of time.

Fortunately, the Fed members announced the following week that tapering was not inevitable and would only occur if the economy continued to improve (which is exactly what Bernanke said in his conference on June 19th). After that explanation, the markets rallied some, although it still left virtually all equities and the bond market in losses for the month of June.

At Rollins Financial, we do not invest for the short-term, and we understand that market volatility is part of the game. While it’s interesting to understand why things happen, it’s more important to be able to rejoice in the results.

It would be crazy for me to report that the second half of 2013 will be as excellent as it was during the first half. While we’d all love for that to be the result, it would be foolish to forecast a return as good as we’ve enjoyed thus far in 2013. However, I also do not see a major downswing in the coming months.

The economy, undoubtedly, is somewhat better than it has been over the last few years. Even though the most recent quarter was reported at an anemic 1.8%, it continues to at least be positive. It appears to me that the 2nd quarter of 2013 will come in very near that 1.8% level, and therefore, it doesn’t appear that the economy is moving at an uncontrolled pace to the upside. Inflation continues to be mild at 1%, and corporate profits continue to be excellent. There is no question that corporate profits are decelerating, but they continue to be at all-time highs and are still growing, even if at a modest pace.

With the large hit that the bonds suffered in the second quarter, I believe that we’ve already seen the worst. I anticipate for bonds to continue improving as the year progresses because interest rates are still very low and the economy is not accelerating at a quick pace. As such, it’s too late to sell out of your bond funds and they are still required for diversification purposes in almost all portfolios.

The housing market has unquestionably vastly improved, and this positive news is evident in almost every segment of the market. As the housing market picks up, it will help improve the rest of the economy since so many segments of that market affect our economy on the whole.

What do I see happening over the rest of this year, and what should you to expect to earn in your portfolios? I must reemphasize that almost all interest-bearing certificates are earning next to nothing, a complaint that we hear from investors on almost a daily basis. Unfortunately, some investors continue to hold assets in cash earning zero, even when very conservative financial instruments can earn close to 4%. To a large degree, this period of low interest rates, in my opinion, will force the market higher.

With inflation under control, the economy not going gangbusters and real estate improving, I see corporate earnings continuing on a positive track. Even with the huge drain on the GDP from higher taxes in 2013, the economy continues to operate above break-even. Although Congress did everything they could to mess up the budget, sequestration has forced them to cut federal spending, and for the first time in over a decade, the federal deficit is actually falling. Hopefully sequestration will continue, and Congress – against its will – will be forced to continue to cut spending.

All of that said, I anticipate the markets to earn between 4% and 7% for the rest of 2013. The best markets in the world continue to be the U.S., and the correction in the bond market has already occurred. If you anticipate the markets continuing to earn at the aforementioned levels, why would you do anything other than invest for your future?

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

Best regards,
Joe Rollins

How are those Gold and Silver Coins Working Out?

From the Desk of Joe Rollins

Every morning I watch the financial news for about an hour and a half before getting ready for work. I don’t know why it took me so long to notice, but it occurred to me this morning that there wasn’t a single commercial for gold and silver collectible coins. There also was no mention of the world coming to an end, money being worthless, or life as we know it ending soon.

As I have explained many times before, I do not invest in gold because I consider it to be speculation, not investing. (See my previous blog on that particular subject.) The reason I don’t invest in precious metals is because there’s no way to evaluate whether the price is reasonable or even fair. How do you evaluate something that has no earnings, no cash flow (no dividends), is not particularly scarce, and only changes hands on an individual basis? I vividly remember when gold (GLD) and silver (SLV) ETFs started, with the exclamation that it enabled average investors to purchase gold and silver without actually having to take physical delivery of the metal.

Since the first of the 2013 year, GLD is down a stunning 23.79%. It’s even more pronounced when you take the current quarter into consideration, noting it’s down 20.07%. The same goes for SLV; it’s down 35.6% for the year-to-date and 31.15% for the quarter. As of yesterday, the S&P 500 is up 12.5% year-to-date. Does it surprise you given those statistics that you do not see any advertising right now for gold?

As I have mentioned many times in the past, these gold and silver coins that are advertised on TV are even worse investments. They have virtually no market except generally from the person who sold them to you. They contain very little of the precious metals and would have to be melted down in order to obtain even a small percentage of the metal. Therefore, from an investment standpoint, these coins are virtually worthless.

When the actual metal is put in perspective, it’s interesting to see how the market reacts to the price. As the price of any commodity goes up, more and more of the commodity is mined. It’s a simple definition of supply and demand. If the prices get high enough, people will spend the money to mine it. As the price of gold and silver continued to rise over last few years, increased production of the precious metals have made the supply increase, reducing the value of the commodity.

It was once said that gold was the ultimate hedge for inflation, and therefore, you should purchase gold if you wanted to inflation-proof your portfolio. That seems to fly in the face of the increase in gold over the last few years, since inflation has been extraordinarily low. Then there are those who argue that gold is really the protection against deflation. You couldn’t really argue with that since there’s not been deflation in the U.S. for many years.

In summary, investing in precious metals is not like investing in stocks and bonds. With financial instruments, you can actually evaluate their cash flow, earnings and market reaction to those known facts. With precious metals, however, there is no cash flow, earnings or anything else to evaluate except public sentiment. Since I cannot evaluate that, this is an asset class we avoid.

For those of you who bought commemorative gold and silver coins, I suggest you dig them out of your underwear drawer today and see if you can sell them back to whoever sold them to you. I think that’ll help you see how investing is different from speculation.

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

Best regards,
Joe Rollins

Let’s Discuss Investing (not Speculation)

From the Desk of Joe Rollins

The media has been shouting for the last several days that the financial markets are in turmoil and a severe correction has started. If you read the front page of many national publications, you can almost rest assured that the information is sensationalized. While the markets have undoubtedly been extraordinarily volatile over the last three weeks, there is no reason for investors to panic.

The markets have been down in excess of 500 points over the last two days, but don’t be so quick to forget that on Monday and Tuesday together, they were up greater than 200 points. These movements in the market are symbolic of trader activity – traders who were likely trying to take a position before June’s triple witching day. This is the third Friday of March, June, September and December, and it is the expiration day for three types of standardized contracts: stock options, stock index options and stock index futures. Investors often unwind their positions on these contracts during or immediately before triple witching days, leading to increased trading volume. Unfortunately for us, none of these items have to do with investing – they have to do with speculation.

At approximately 3:00 p.m. EST on Wednesday, June 19th, Federal Reserve Chairman Ben Bernanke gave a press conference regarding the economy. Almost immediately afterwards, the markets took a huge nosedive. The sell-off continued on Thursday, causing the Dow to fall 354 points for the day – its biggest loss of the year. What did Bernanke say that caused such an adverse effect on the markets? That the economy was falling into a recession or depression? That unemployment was getting ready to skyrocket or that the U.S. government was going to default on its bonds? Nope, not at all.

Bernanke said Wednesday that, based on current positive economic conditions, the Fed might start to cut back its bond purchasing starting in the fall and stop buying them entirely during 2014. He also said that the Fed would hold onto the securities it owns and reinvest the interest from them, which he expects would help keep long-term rates low.

There’s been great anticipation in the investing world as to what the Fed would do with its bond buying program. The Fed is currently buying $85 billion monthly in bonds in the open market to keep interest rates low, and they have been tremendously successful in keeping interest rates near zero which is helping the real estate market. Bernanke basically gave us his strategy in the bond buying program, and said that if the economy does not perform as expected, then they would not cut back and ultimately end its bond purchasing. What explanation could have been clearer?

Responding to a question from the audience, Bernanke made it absolutely clear that he didn’t anticipate any interest rate increases until 2015. Make sure you understand that he is talking about a two-year period from today before the Fed even contemplates increasing interest rates – a move that they will only make if the economy can support such increases. I can’t imagine anyone who was paying attention to his words misinterpreting Bernanke’s specificities and the Fed’s intentions.

Not only was the information relayed by Bernanke good news for investing, it also provided two other important positive indicators for investing. Specifically, the Fed moved up its GDP projection for 2014 to a range of 3% to 3.5%. This isn’t robust, but it’s a long way from negative. The Fed also forecasts the U.S. unemployment at 6.5%-6.8% in 2014, a remarkably better percentage than the current rate of 7.5%. Therefore, the Fed’s analysts feel that the economy is set to improve through 2014. Once again, this is a very positive sign for equity investing.

As a supplement to the other financial information, the Fed reported that its anticipation for inflation actually ticked down. They expect inflation over the next few years to be less than 2%. In fact, the core rate (excluding gas and food) for the last 12 months is only up less than 1%. Low inflation in an improving economy is a very positive sign for the stock market.

Given all of the positive information provided by Bernanke, who would’ve expected the negative reaction by the financial markets? In addition to the Dow’s 5% sell-off, bonds were absolutely crushed over the last two days. The 10-year Treasury bond has gone from 1.4% in May to 2.43% - a historic move in such a short period of time. And did I mention that the anticipation for inflation was virtually zero, which would imply lower bond yields, not higher interest rates? Duh – what is going on here?!?

My point is this – the reaction from traders should be ignored by investors. Investors need to evaluate the underlying investing environment and not worry about the day-to-day volatility brought on by traders. The truth of the matter is that for the month of June alone, the S&P is down only 2.5% and continues to be up 12.4% year-to-date. This performance is quite remarkable only 5.5 months into this investment year.

There’s no question that bonds have been crushed over the last few months, but I believe this topic has been grossly exaggerated. For the first time in years, a 10-year Treasury actually has a positive real rate of return. If you can buy a Treasury bond at 2.4% and inflation is only 2%, you are finally actually making some money. That has not been the case over the last three years when Treasuries have had a negative real rate of return.

While the correction in bonds has been severe, I anticipate that they’re highly likely to make money over the next year. It’s unlikely for the rates to continue going up an enormous amount over the short-term. My forecast is that a few years into the future, interest rates will have to increase and bonds will have negative rates of return. But, I don’t believe that is an immediate concern for the next 12 months.

As for equities, virtually every positive economic indicator remains intact:

Corporate earnings continue increasing going forward.

The economy is forecasted to continue to expand up through 2014.

The Fed has indicated there will be no significant interest rate increases through 2015.

Even though interest rates are higher, they are still at historic low levels.

Because interest rates are still low, buying Treasuries or CDs provides rates of return that barely matches the cost of living.

Money markets are paying virtually nothing.

Corporate balance sheets are rock solid.

Corporations and individuals currently have $3 trillion of un-invested cash in money market accounts.

There’s no question that the economy is improving in our part of the country. There’s new residential construction everywhere around my house, and the house across the street from mine (which was vastly overpriced) sold in less than 30 days. Potential homeowners are finally seeing that when interest rates start to move up, they need to move quickly to purchase property before the move occurs. Economic activity, again, is created every time a new house is built or sold.

I will provide a more in-depth analysis after the end of the financial quarter (June 30th), but because of the high volatility in the markets this week, there were some things I wanted to point out to you regarding investing. At Rollins Financial, we are not traders, and if you are an investor, nothing that has happened in the last 30 days has been anything but positive for investing into the future.

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

Best regards,
Joe Rollins

Interest Rates Start Moving Up – International Markets Falter, but U.S. Stocks Continue to Trend Higher during May

From the Desk of Joe Rollins

We knew the day that interest rates would start rising would come eventually. Due to mixed signals coming from the Federal Reserve, that finally started to happen during the month of May. The very important 10-year Treasury bond has moved up from approximately 1.5% to 2.1% in recent weeks. And while 2.1% is still historically an extraordinarily low rate, this move has been fairly dramatic considering the relatively short period of time that it has occurred.

Interestingly, there’s little reason for this quick increase in interest rates other than the perception that, at some point soon, the Fed will reduce its accelerated buying of bonds in the open market. Also, the short-term traders believe that they must be ahead of every trend (even if it’s a year in advance), and during May, the general presumption was that the Fed would sooner rather than later reduce their support of the bond market. I don’t believe that concept for a second, but as the old saying goes, “Don’t fight the Fed!”

May was another very good month for the stock market. As every month in 2013 has proven thus far, if you’re invested in quality mutual funds, then it’s highly likely you’ll make a profit regardless of the underlying economic news. The S&P Index of 500 Stocks was up a very satisfying 2.3% for May, and it is now up 15.4% for the year. The NASDAQ Composite also turned in an excellent performance, up 4% for the month and 15% for the year. The Dow Jones Industrial Average was up 2.1% for the month and 16.5% for the year. Even the small-cap Russell 2000 Index was up 4.1% for the month and 16.6% for the year. It’s remarkable that all four of the major market indices are up almost the same percentage for the year, and the range from 15% to 16.6% for four broadly-based indices shows how strong the equity markets have performed thus far in 2013.

The performances of the other asset classes in the financial world were not as satisfactory. Because of the increase in interest rates, virtually all bond funds suffered a decline during May. In fact, the aggregate of all bond funds declined 1.9% for the month. Even the otherwise reliable high-yield bond funds had marginal losses for the month. While you would certainly expect negative returns when interest rates move up, I am not of the opinion that bonds will continue to suffer losses for the rest of the year. Rather, I believe the increase in interest rates that we saw in May was a market phenomenon that, at its core, had nothing to do with the underlying economics. We’ll continue observing these movements over the coming months to see if a negative trend continues.

More concerning is the performance of the international markets, which almost exclusively suffered losses during May. The high-flying Japanese market took a major hit and was down significantly during the month. Interestingly, the only major international market to have gains during May was the Chinese market, and its economy probably spooked the sell-off in the first place. There is no question that China is slowing, but almost all international markets are teetering on break-even or negative GDP.

Unfortunately, the European economies just can’t seem to get out of their own way. With their generations of big government and bloated public works systems, they just can’t seem to figure out how to change the economy from government-based to private-based. Hopefully, Europe is slowly but surely catching on and in the coming months their economies will stabilize.

During a conversation with a client the other day, it became apparent that the returns for the stock market are often misperceived by average investors. This particular client proclaimed that the stock market’s returns over the last decade were fooling investors about long-term performance. He assured me that bonds had outperformed stocks over the last decade, and he was even willing to make a wager on that fact. I didn’t want to be too argumentative so I accepted his presumption, although I was relatively sure he was incorrect.

After reviewing the facts, I found his information to be totally flawed. Over the last 10 years, the S&P 500 has averaged an annual return of 7.6%; the NASDAQ has averaged 9%; the DJIA has average 8.2%; the Russell 2000 has averaged 9.8%; and the Barclay’s Aggregate Bond Index has averaged only 4.4%. As you can see, bonds have, on average, returned less than half of the broad major market indices. The media’s constant pounding of some impending downturn in the market has convinced investors to believe information that is not supported by reality.

The increase in interest rates during May created a strange and unusual investment environment. For some reason, the momentum traders believed that the increase in interest rates would somehow affect the excellent performance that high-yield dividend stocks have enjoyed for the last several years. How anyone could logically assume a 2.1% Treasury could compete with a utility stock paying 4.5% continues to be a mystery to me. However, traders tend to move in waves in the same direction at the same time.

During the month, there was a fairly significant sell-off of utility and high dividend stocks. As a group, the telecom and utilities index lost 6.9% for the month. It defies imagination that anyone would sell a high quality utility stock to purchase a Treasury yield of 2.1%, but perhaps I’m wrong. I believe you’ll see this sector recover over the next few months as the realization sets in that higher interest rates are not in the offering. Keep in mind that CDs continue to earn almost zero…

As we enter into the dreadful investing months of summer, I find myself answering the almost daily question of where we stand today. Frankly, the economy seems to be going nowhere – which is not all bad. While the housing sector is certainly improving and there are other positive signs for the economy, it simply doesn’t seem to be improving very quickly. As strange as that seems, that’s actually a positive sign for stock market investing. As long as the economy continues to be flat, it’s highly unlikely that you’ll see the Fed stop its massive stimulus initiative. By virtue of a slow economy, I think you’ll continue to see the Federal Reserve expand the monetary base, which is nothing but positive for stocks.

Of course, there are many potential concerns. We can all fret over the huge tax increases all of us will suffer at the beginning of 2014. It’s now being reported that medical insurance rates will increase significantly in January to accommodate the Obamacare provisions. Additionally, there are potential repercussions from the huge new taxes being instituted on the wealthy, which I fear most taxpayers don’t realize. The European economy continues to putter along and Asia is clearly trending down, even though it’s still quite posi¬¬¬¬tive. I could make a long list of things for us to worry about, but I would also be compelled to tell you not to worry just yet.

As I’ve often mentioned, the major positive investing component continues to be the support of the stock market through higher earnings and low interest rates. Even with the increase in interest rates, the S&P 500 dividend yield is still higher than the interest rate earned on the 10-year Treasury. Rarely has this high dividend rate extended over such a long period of time (i.e., higher than the 10-year Treasury). Earnings continue to be excellent and even though the rate of increase is decelerating, it continues to go up, not down.

For the time being, everything appears to be stable from an investment standpoint. As you know, anything can change overnight. It wouldn’t be unexpected to see a 10% decline in the market at any time for no good reason, but with almost no better alternatives for investing money, I would be surprised to see a major decline for the rest of 2013. In fact, corporate earnings appear to be on pace to increase in 2014, which is always a positive.

There’s been much publicity regarding the projected decline in the federal deficit over the next several years. I wonder how much of those projections were tainted by the fact that many taxpayers pre-paid taxes in 2012 to avoid the huge increases in taxes in 2013 and 2014. If these projections were based on the analysis that these tax gains to the government would continue, then those projections couldn’t possibly be true. Unfortunately, the federal government continues to do absolutely nothing, and therefore, the huge deficits will continue. Congress may criticize sequestration as being inappropriate, ill-advised and misplaced. From my standpoint, it’s the only thing Congress has done right in a decade or so.

Now is an excellent time to visit with us and review your financial plan. And if you have cash sitting around earning nothing, what time could be better than now to consider investing that cash?

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

Best regards,
Joe Rollins

Events that Changed the History of the World

From the Desk of Joe Rollins

I can never pass up an opportunity to remind you how good the financial markets have been lately. For 2013 through May 20, 2013, the S&P 500 is up 17.8%. Whenever the market is up this much, I find myself worrying about clients who have money sitting in checking accounts. At the current time, most fixed-interest rate instruments are yielding a negative real rate of return. Investors who are keeping vast amounts of money in cash are actually losing purchasing power.

I also think about investors who do not make their IRA contributions early in the year. With the S&P 500 up 17.8% so far in 2013, people who wait until the last minute to make their annual IRA contributions are missing out on a fabulous opportunity to generate higher returns.

It’s still not too late to invest. Even though the market is up and setting records almost every day, investing in the stock market continues to be relatively cheap by historic standards. Simply put, equity investments are the best game in town.

Most of my posts focus on mind-numbing economic facts and financial information, but I watched a documentary last night regarding World War II that I thought some of you might find interesting. I’ve always been a history buff and I enjoy learning new things, and this particular documentary presented information that I had not previously heard.

I was watching the Braves game on TV last night, but I quickly lost interest in the game after they ran up the score fairly early. I switched over to the Military Channel and happened upon their two-part series on events that changed the history of the world. This particular episode focused on the dropping of the first atomic bomb during World War II.

History and science are very interesting when looked at together, and the invention and evolution of the atomic bomb is no exception. One interesting fact that I did not know is that the atomic bomb that was dropped on Hiroshima on August 6, 1945 (“Little Boy”) had never even been tested. They had absolutely no idea whether the bomb would explode in the plane or if the plane would not be able to escape the violent blast. They were basically working on theories.

I vividly remember growing up in the aftermath of World War II during the 1950s and hearing about the atomic bomb. With the Cold War in full force, the headlines warned of impending nuclear war, and in fact, I remember seeing the nuclear test explosions on the nightly news. I also vividly recall the push for families to build their own bomb shelters in the late 1950s, equipped with food, water and other types of rationings to allow you to survive an atomic bomb attack. In school we practiced atomic bomb drills where we would hide under our desks – as if we actually would’ve avoided the devastating effects of an atomic bomb by hiding under a desk.


What I found so interesting about the Military Channel’s documentary were the interviews of the principals involved in the Japan bombings. Colonel Paul Tibbets, the pilot of the Enola Gay (named after his mother), the first aircraft to drop an atomic bomb in the history of warfare, provided some very compelling food for thought. He was an interesting character, and he described how the plans to drop the atomic bomb had occurred over many months. In fact, he and other B-29 Superfortress Bombers had flown almost daily over mainland Japan, but since their planes were flying at over 30,000 feet, the Japanese tended to ignore them. They were just too high for any aircraft fire to reach and the Japanese Zeros were incapable of doing much damage to those types of planes. For months, the crew dropped practice missions against Japanese-held islands and mainland in preparation for the final run.


On August 6, 1945, the Enola Gay departed from Tinian, a remote island in the South Pacific. After a six-hour flight from the island, the crew was over the mainland of Japan, and exactly on schedule, dropped “Little Boy” over the city of Hiroshima. The bomb was designed to explode at exactly 1,968 feet off the ground, a mere 43 seconds after it left the plane. Due to the extraordinary explosion, the crew had only a short period of time to clear the area or expose themselves to the nuclear fallout.

Obviously, the bomb caused enormous destruction, destroying nearly 4.7 square miles of the Hiroshima city and causing approximately 70,000 to 80,000 people – about 30% of the city’s population – to perish. Of course, the death toll is higher due to radiation poisoning that occurred over the years as result of the explosion. Undeniably, the bombing of Hiroshima and Nagasaki on August 9, 1945 brought a swift and complete end to World War II.

Colonel Tibbets was a national hero that was held in high esteem by the military for his part in this mission, but he was controversial because of his role in the destruction caused by the bombing. He explained in the documentary that many history teachers do not seem to understand WWII, and he reflected on a speech he was giving to a high school audience where he was introduced as the pilot in “World War Eleven.” However, he expressed no regrets in bombing Hiroshima since the Japanese government was routinely killing his friends and comrades in the military, and whatever it took to end the war was acceptable to him.


History teaches us many things, and while atomic energy is necessary and is the cleanest, most efficient type of energy available today, nuclear bombs for military purposes must never be used in the future. While this story has nothing to do with the stock market, it is a lesson well learned.

On a personal note, congratulations are also in order to my son, Josh. He and his golf teammates at Woodward Academy won the Georgia High School Association state boys golf championship by four strokes at the difficult Reunion Country Club golf course in North Atlanta.


Josh shot an outstanding 74 (two over par) at the tournament, which is even more impressive when you take into account that he triple-bogeyed a hole. In fact, five of the six players on Woodward’s team shot in the 70s at the tournament, a difficult feat that those of you who play golf understand. I’m very proud of Josh and his teammates’ accomplishment in winning this prestigious event.

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

Best regards,
Joe Rollins

Q&A Series – Qualified Education Expense Tax Credit

From the Desk of Joe Rollins

This week’s question comes from a client who would like more information about Georgia’s Qualified Education Expense Credit

Q. I’m interested in donating to a Georgia Student Scholarship Organization. How does that work, and what are the tax advantages? Would my contribution cover any of my son’s private school tuition?

A. This is a timely question, because Governor Deal recently signed House Bill 283, which includes important changes to the Qualified Education Expense Credit. There are a lot of taxpayers who could be positively impacted by this credit, so thanks for your inquiry.

First, Student Scholarship Organizations (“SSOs”) were enacted by former Governor Sonny Perdue in 2008, to provide scholarships to independent K-12 student schools by using Georgia income tax credit-eligible charitable contributions. In short, taxpayers making donations to SSOs receive dollar-for-dollar income tax credits against their Georgia income taxes for their contribution. So, for example, if a married couple filing a joint return owes Georgia income taxes and makes a contribution to an SSO, it will reduce their Georgia income tax balance by the amount of the contribution, and they can also take a charitable donation deduction on their federal income tax return for their contribution amount if they itemize. That’s a pretty good deal, right?

In general, the maximum amount a married couple filing jointly can donate to an SSO per tax year is $2,500 (the maximum for an individual is $1,000). And if an individual has paid all of his/her Georgia estimated taxes for a tax year and then makes an SSO contribution in the same tax year which results in an overpayment after applying the tax credit against the Georgia income tax due, then the overpayment can be paid to the taxpayer. Also, for individual taxpayers, the credit may not exceed the taxpayer’s income tax liability, but the amount of the excess credit amount can be used against the taxpayer’s tax liability for the next succeeding five years.

Unfortunately, prior to HB 283, the only corporation type that was eligible to receive a tax credit for amounts contributed to an SSO, up to 75% of their income tax liability, were C corporations. Unfortunately, members of LLCs, shareholders of S corporations, and partners in partnerships were precluded from counterbalancing their share of the entity’s income by claiming the credit.

The passing of HB 283 has changed those rules, and now owners of pass through entities may claim a credit up to $10,000 per tax year. Spouses may also claim a credit for their ownership interests, which means they are separately eligible for the credit if they file a joint return. Please note, however, that the tax credits are only allowed on the Georgia income for which such tax was actually paid by the owner of the entity.

In the foregoing scenario, the total credit allowed can’t exceed $10,000, even if the taxpayer is an owner of more than one pass through entity. Therefore, the taxpayer must decide which pass through entities to include when computing Georgia income for the purposes of this credit. All Georgia income, loss, and expense from the selected pass-through entities are combined to determine Georgia income for the credit, which is then multiplied by 6% (Georgia’s tax rate) to determine the tax that was actually paid. In this case, if a credit is more than a taxpayer can use in the year, the excess amount can’t be carried forward.

It’s also important to note that if you are a member of an LLC, S corporation or partnership owner and you’ve already made an SSO contribution under the terms of the old bill (i.e., $2,500 or $1,000), you can still apply right now to make a donation for the difference under the changes pursuant to HB 283.

Part of HB 283 increased the Qualified Education Expense Credit Cap for 2013 to $58 million. Amounts are allowed on a first-come, first-served basis, and once that cap has been reached, there will be no more credits available for the 2013 tax year. If you are interested in contributing to an SSO for 2013, you need to do so ASAP – 75% of the $58 million cap for calendar year 2013 has already been preapproved.

The first step in contributing to an SSO is to check with the school of your choice to see if it is a participating school and if it partners with a particular SSO. Most SSOs provide a paperless process for redirecting your tax dollars to the institution.

Alternatively, you can apply for the income tax credit for qualified education expenses on your own by completing and filing a Qualified Education Expense Credit Preapproval Form, which is used to request preapproval of an intended contribution to an SSO. The Georgia Department of Revenue has 30 days to either preapprove or deny the requested amount, and once preapproval is received, the taxpayer has 60 days from the date of the preapproval notice – and within the calendar year in which it was approved – to make their contribution to their designated SSO.

Some additional important information to keep in mind is as follows:

Consistent with the federal treatment of charitable donations, a contribution to an SSO can’t be directly or indirectly designated for a particular individual – whether or not such individual is a dependent of the taxpayer. As such, contributions to SSOs are not payments toward your child’s private school tuition.

Although you can’t designate a particular individual for your contribution, you can designate that it be used to provide scholarships to students of a particular school (or multiple schools).

You can click here for a list of Georgia SSOs from the Georgia Department of Education. Note that an SSO may support several different participating schools.

I hope the foregoing has given our readers some useful information regarding Georgia Qualified Education Expense Tax Credit. These credits are useful tools in providing significant tax savings to taxpayers which ultimately provide scholarships or tuition grants that allow students to attend any qualified K-12 private school. Of course, this is a very complicated matter, so please contact us if we can provide more guidance and evaluate your particular situation.

We encourage our clients and readers to send us questions for our Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins