Wednesday, December 27, 2017

Tax Cuts & Jobs Act

As everyone is aware by now, President Trump signed the tax reform package into law last Friday. While the tax bill contains numerous provisions, we wanted to pass along only a few key items to consider for 2017 and 2018 that may affect some or all of our clients. And you only have a few days of 2017 remaining to take advantage of a few key strategies to wrap up this tax year. Here we go!

• In 2018, the estate tax exemption is jumping from $5.6 million to $11.2 million per person. That is a significant hike and can be transferred to your spouse upon death for a collective estate tax exemption of $22.4 million. Get out there and buy those lottery tickets! The annual gift exclusion will be $15,000 per person per recipient in 2018.

• The standard exemption is almost doubling in 2018. For single filers it will be $12,000 (from $6,350) and for married couples filing jointly it has increased to $24,000 (from $12,700). This increased standard deduction will definitely benefit those of you are that are unable to itemize, but even those of you that used to itemize may find that the new standard deduction is higher than your itemized deductions. If you think you will be using the standard deduction in 2018, you likely will want to accelerate your charitable contributions into 2017 to take advantage of that deduction.

• In 2018, Schedule “A” miscellaneous itemized deductions – typically unreimbursed business expenses for W-2 folks, investment management fees, and tax return preparation expenses, including distributions – are not allowable. Consider pre-paying those business expenses and fees now if you typically receive a deduction for them. Thanks!

• In 2018, Schedule “A” state and local income tax and property tax deductions are limited to $10,000. Therefore, we would encourage all of you to be sure to pay your 4th quarter state estimated tax payments and 2017 property taxes BEFORE the end of 2017. This will at least allow you the benefit of potentially taking advantage of a deduction for these items during 2017. If you still owe Fulton County or City of Atlanta since those property tax bills came out so late this year, pay them now rather than in January. If you escrow those payments, call your mortgage company and request that they be paid now.

• Mortgage interest deductions are limited to $750,000 of principal residence and second home debt. This debt limit was previously $1,000,000 with a home equity line kicker of $100,000. There is no longer a home equity line kicker. Therefore, if your debt is greater than $750,000, you might consider accelerating a mortgage payment or two into 2017 to take advantage of that interest deduction.

• Several of the seven tax brackets have been lowered for 2018. In that regard, we would recommend deferring business income for the next few days if possible. There is also a very complicated pass-through entity business income deduction that may be beneficial for some of you with flow-through entity income.

• The electric car credit expires at the end of 2017. If you are considering a purchase, you have 4 days to complete the sale!

• 529 accounts can now be used to save for elementary, secondary and higher education. Consider making contributions and having family members make contributions. The amounts that you can withdraw for lower level education are limited, so please discuss with us before doing so. Fund your 529’s now!

• There will be no more exemption allowance in 2018. Some of you had this phased out already and are used to not having this exemption allowance, but those of you with children that did not have this phased out will likely see an increased child tax credit. It will double from $1,000 to $2,000 per child under 17 years of age. And it will be available to more filers as the income threshold to receive the credit has increased for joint filers who make up to $400,000.

• Likely a lot less of you will experience the AMT in 2018 when the exemption amounts and the phaseout thresholds have been increased.

• Accelerated bonus expensing of qualified business property purchases has been expanded to 100% of property placed in service through 2022 on new or used property.

• New C Corporation tax rate is a flat rate of 21% in 2018 and no AMT.

The above information constitutes a very limited summary of some of the key provisions in the new tax reform bill along with our recommendations for possible key items to make sure you do over the next few days given the changes. Please contact us directly for questions if you feel you have a specific situation that has not been addressed above. We look forward to working with you during 2018 and wish you all a very happy new year!

Best Regards,
Danielle Van Lear

Monday, November 6, 2017

$5.8 billion or $28.7 billion?

Before I explain the title of this blog, I wanted to cover a few economic events that may be of interest to you. The Atlanta Federal Reserve recently announced that their projected GDP for the fourth quarter of 2017 was an almost unbelievable 4.5%. If by chance the economy improves by that percentage, it would be the best economic year for the United States in a very long time. However, the evidence of a strong economy continues to be everywhere in sight. Employment is at full capacity and construction is everywhere you turn, yet some forecasters are projecting a short-term recession, defying any type of logic or economic training whatsoever. If the economy continues to strengthen, there is absolutely no question that stock prices will continue to go higher.

The employment report for the month of October was announced and once again the strong economic reality is overwhelming. The unemployment rate fell in October to 4.1%. Incidentally, that is the lowest level of unemployment since December 2000, almost a full 17 years ago. As I have posted on so many occasions, any time the unemployment is less than 5%, economists view employment as full, so we can easily check the box next to that one. And the good news continues to roll in…October was the 85th straight month to net new jobs in the economy. Think about that for a second; that is over 7 years where every single month showed a net positive increase in employment. One of the major components of improved GDP is having everyone work. Therefore, the above 4.5% forecasted GDP for the fourth quarter of 2017 is not so far out of the realm of imagination given that employment in the United States is full. When more people are working, more people have the financial capability to contribute to the GDP.

Ava at ice-skating

Ava ready for trick-or-treating

Danielle with Caroline & Reid

Before I cover these extraordinarily interesting topics and explain the title of this blog, I need to cover the economic markets for the month of October. Despite October’s reputation for being the scariest month of the year for the stock market, it was once again a flourishing market which added to an already impressive fiscal year. The Standard and Poor’s Index of 500 stocks was up 2.3% for the month of October. For the 10 months ended October 31st, the S&P is up 16.9% and for the one-year period ended in October, it is up 23.6%. The Dow Jones Industrial Average was up a sterling 4.4% in October and is up 20.6% for 2017. For the one-year period ended in October, it is up an almost unbelievable 32.1%. The NASDAQ Composite was up 3.6% in October, 26.1% for 2017 and up 31.1% for the one-year period ended October 31, 2017. Just for basis of comparison, the Barclays Aggregate Bond index was exactly zero for October, up 2.9% for the year and up 0.6% for the one-year period ended in October. Once again, investing in bonds was a losing effort as the broad market equity indexes continue to excel.

With the higher GDP forecasted for the fourth quarter, I am sure everyone is excited about the possibility of a higher business level and increased commerce for our businesses. However, I would like to argue that there is a high likelihood that the reported and official GDP is grossly underestimating the actual GDP. The process under which the GDP is calculated is decades old and could not possibly capture current activity in the business community.

I am sure you are very curious about the title of this blog. Basically, these amounts are each the total net income of four U.S. companies. See if you can guess which amount is the total net quarterly income for General Motors, Exxon, General Electric and AT&T and which is the quarterly income for the new economy players - Facebook, Alphabet (formerly Google), Apple and Microsoft.

The smaller of the two numbers above is actually that of the old-line companies (General Motors, etc.) and the higher amount is that of the new technology companies (Facebook, etc.). As you can see, net income for the four old economy companies is less than one fourth of the net income for the new economy players. While it is very easy to calculate GDP growth with General Motors, Exxon, General Electric and AT&T, it is almost impossible to calculate the GDP growth of Facebook, Alphabet, Apple and Microsoft. For some time, my argument has been, “How do you actually calculate the GDP acceleration for companies in the new economy?” When you click on the mouse, does that really affect gross domestic product? For example, Facebook can send a message to its 1.5 billion users around the world. How is that information calculated and interpreted when calculating gross domestic product. I do not believe it is.

Would you be surprised to learn that all of the old-line companies that have been in business for generations have accumulated cash on their balance sheet of $207 billion? As of June 30, 2017, the new-line companies (the oldest being 27 years old) have a cool $537 billion on their balance sheet. Therefore, the new companies have more than double the cash than the old companies. This is not a 1999 phase of internet companies being created that do nothing; these are very serious and profitable companies that have accumulated vast sums of money that, in my opinion, are not measured by the current GDP calculations that we see today.

Let’s just assume for a second that I may be correct. What if GDP in today’s economy is understated by the current calculation of GDP, which does not take into consideration the gains in the economy created by technology. Couple that with a worldwide boom in economic activity. Business sentiment in Japan and Europe is at a 10-year high. Last month, manufacturing activity in the U.S. hit its highest level in 13 years. The Japanese stock market is absolutely on fire, and for the first time in decades, the Japanese economy is registering a positive GDP growth.

There is also a huge increase in the business activity within the emerging markets. China is the world’s largest consumer of raw materials such as oil, steel and copper. When they cannot produce enough in their own economy, they are increasingly buying these raw materials from emerging economies. The two-sided effect of this movement is that the emerging markets’ producers are stabilizing and China is receiving these items at a reduced price – both of which are good for the world’s economy.

This week, the Committee on Ways and Means gave us the first rough draft of the new tax bill. Believe it or not, I have actually read the bill. While there are things that I disagree with, there is absolutely no question in my mind that if passed, this will dramatically improve the economy in the U.S. by heavily cutting the corporate tax rate from 35% to 20% and by allowing repatriation of funds back to the United States at a preferred rate of 12%. This tax act could dramatically increase business activity and corporate profits in the U.S. I hope you encourage your elected officials to support this bill - and to those who think that this is just a giveaway to the rich and powerful corporations, feel free to call me to discuss further.

Therefore, we are seeing a double-headed stimulus going into 2018, with higher business activity and lower tax rates. Quite frankly, it does not get any better than that. So if corporate earnings were to go up by virtue of a better economy and by virtue of lower taxes, the price earnings ratio of the current stock market would fall rather than go higher as the market goes higher. Until I see some sort of evidence that the U.S. economy is falling into or is forecasted to be in recession, it is highly unlikely that I will change that opinion.

Every day I am confronted by clients who say the stock market needs to go down. When I ask them why they believe that they indicate, “That’s what it always does.” The last year that the S&P 500 was actually down for the year was in 2008. We are coming up on almost a decade of positive stock market performance. Markets do not go down just because they have been up for too long. This has already been the longest economic expansion in the history of the U.S. economy. Almost a full decade of economic expansion...There is no law, axiom or even conversation that will bring the stock markets down, only recession.

In fact, I am getting tired of explaining old Wall Street axioms that are no longer valid. Do you remember the famous quote, “Sell in May and go away”? This falls under the theory that nothing positive happens during the summertime and investors should sell all of their assets in May and not reinvest until the fall. As an example, if you had sold in May of this year and not reinvested until November 1st, you would have lost in excess of a seven-percentage point increase in the S&P 500. Still think it’s worth adhering to?

Often times I wonder why people say they will just wait until the market cracks to invest. Let me give you an example that should put that opinion to rest. Let’s assume that you made the absolute worst investment decision that you could ever possibly make and invested all of your earthly possessions in the Dow Jones industrial average in October of 1987. For point of reference, let’s say you did it the Friday preceding the stock market crash on Black Monday when the markets caved 22% in one day. If you had invested on that Friday, you would have been investing in the stock market when it was at a cool 2200. On Monday, the market went down 22%, creating economic chaos in the financial world. That same index today is 23,539. Assuming you heeded the advice of your financial advisor and stayed invested the entire time your investment would have gone up 10 times the original amount that you invested, notwithstanding the worst possible timing that you can imagine. If you wait for a downturn to invest excess cash, there is that likelihood that you will not get that opportunity for years to come.

In summary, it has been a remarkable year for the stock market through October 31, 2017. I fully anticipate that the markets will move higher, but it will likely be more volatile and less dramatic in the coming months. However, with an excellent U.S. economy and the world’s growth expanding, I fully anticipate higher markets for at least 18 months to come. What absolutely and completely baffles me is why so many investors are sitting in cash and earning zero when they could have earned high double-digit returns for this year. It is never too late to invest and you should do so now.

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

Best Regards,
Joe Rollins

Thursday, October 19, 2017

Visit to a Nuclear Submarine


A junior officer from the submarine USS West Virginia, regarding the status of 170 crew members on-board the submarine as quoted October 11, 2017:

“We go out to sea for approximately three months in a steel tube, no fresh air or water. Every minute underwater, no sunlight, and often in hostile waters... Between us and the sub’s engines is a nuclear reactor, and on-board we can carry up to 24 intercontinental ballistic missiles which have the capability of carrying multiple warheads and combustible torpedoes… what could possibly go wrong?”

I have always been interested in submarines and the military in general, so after actually seeing a nuclear submarine up close, I decided it was time to learn more about what they do. I have always assumed that there were thousands of submarines out there, when in fact there are only 66 submarines in the U.S. Navy fleet. This is surprising given that this is the largest submarine fleet in the world.

Submarines are apparently very difficult to operate and extraordinarily expensive. No military apparatus was more instrumental in bringing down the Russian empire during the Cold War than the nuclear submarine. With billions of dollars spent on building submarines in Russia, they quickly found out they couldn’t keep them running in an efficient manner without creating a safety hazard to the sailors. Thankfully, the deep pockets of the United States protected us from experiencing a similar situation.

In preparation of this blog, I read the book Blind Man’s Bluff by Sherry Sontag, Christopher Drew and Lynette Lawrence. This is a very interesting book that relates the actual day-to-day activities aboard a submarine. If you think the junior officer quoted above sounded crazy, wait until later when I discuss what they do in these bona fide tin cans.

It is funny how things happen in life that make you reflect on the past. In 2009, I took a tour of the Greek Islands aboard a cruise ship. One of the first stops along the way was Istanbul, Turkey. Istanbul is a very interesting city in that it is where Europe meets Asia. It is also unique in that it is essentially the only way you can get from the Mediterranean Sea to the Black Sea. One day while sitting on the deck of the cruise ship eating brunch in the harbor in Istanbul, I happened to look over and saw three, clearly marked Russian nuclear submarines passing through the straits into the Black Sea. Not only was it an incredible and impressive sight, but a truly fascinating one. It certainly made you think twice about your security. And I certainly would have never guessed that years later I would actually see a nuclear submarine, even more technically advanced, up close and personal.





The nonprofit I belong to, which supports the military and the United States security, was recently permitted access to Kings Bay Naval Submarine Base located in Kings Bay in southeastern Georgia (just north of Amelia Island, Florida). You haven’t seen tight security until you’ve seen how tough it is to gain access into a nuclear submarine base. By virtue of this security clearance, we were able to actually climb aboard the USS West Virginia with a guided tour of the submarine and the entire base. This submarine was put into service in 1990 and is almost two football fields in length (560 feet). A submarine is nothing like it is depicted in most movies. It appears neither organized nor particularly suited for the task that it so ably accomplishes. The ceiling is very low and more suited toward shorter seamen. Needless to say, I was not able to walk upright. The ceiling was packed with cables, pipes and other communication aids that have clearly been repainted over the years with white paint. The main control room, where the periscopes are located, is a blur of dials and apparatus that boggle the mind. I was completely surprised when I found out that a submarine has no windows or portholes – its ability to discover and guide the boat is done by sound alone.

We were also able to experience a submarine simulator, and in real time were able to submerge the submarine and then practice an emergency trip back to the surface. It is almost amusing that the submarine moves up and down at a 20-degree angle. They indicated that at 20 degrees the crew can continue to work without interruption. If you have ever tried to walk in a normal manner at 20 degrees, you know that this is not an easy task.

Just to make sure you understand that we are talking about strategic submarines, you have to understand the extent of what nuclear weapons bring to national security. Also, the significance of this sub base could not be overemphasized. As one of the junior officers explained to us, if Kings Bay was a country it would be the third largest nuclear country in the world based on all of the nuclear weapons they have. If that doesn’t make you pause to reflect, nothing will.

There are 170 sailors on the USS West Virginia at any time. As explained by the junior officer, there are only three bathroom facilities for the entire crew. Each submariner is assigned a bunk, which from the surface appeared to be roughly three feet tall and six feet long. In this bunk they can keep whatever personal items they have, such as clothes, reading materials, etc. A typical deployment is around two and a half months and they are only permitted to wash their clothes once a week. Since they have almost no space on the craft, they typically only bring two changes of clothes.

It is also amazing that there is virtually no space for personal time. A typical submariner’s sleeping quarters would include 9-12 sailors. I asked to see the recreational room and it was roughly 10 feet by 12 feet, full of electronic equipment, one small television and a few video games. They have no internet and no communication with the outside, except on a very limited basis. Although they travel near exotic locations, the crewmen never get to see them as the submarine will not surface during the entire voyage.

It is important to understand that every sailor on a submarine is a volunteer. They are selected after extensive research, training and psychological evaluation. Obviously, it takes a special individual to endure the long periods of time under water with no sunlight and away from their family. There are two complete crews to every submarine. After one crew returns from a deployment, the other crew takes the submarine back out, keeping it in continuous operation. The only time that a submarine is taken out of operation is if, by chance, it needs maintenance. These men and women are very committed to their task. Virtually everyone that I spoke with on this day was very excited about being in the submarine corps and intends to stay as long as their superiors will allow them to. I guess there is a double meaning to being committed to a sub.

This particular submarine is called a “boomer”. These submarines go out into the ocean and essentially hide. Since they have the capability to carry nuclear warheads, they are the first line of defense in the United States and their job is to stay undiscovered in the ocean. Often, they do nothing but circle and do figure 8’s for weeks at a time. But what you have to understand about a boomer boat is that they can shoot a nuclear warhead missile 4,000 nautical miles away, meaning they could reach virtually anywhere in the world. With nuclear subs continuously active in both the Pacific and Atlantic Oceans, no country is safe if the U.S. Navy were to launch a nuclear missile.

In all of the famous movies regarding submarines, you often see the submarines floating on the surface, and it always looks like the crewmen are having a great time playing in the ocean. What was not self-evident to me was that submarines, up until recently, were actually driven by diesel engines. You can imagine the smell in a submarine running a diesel engine and the fumes created by burning off the diesel fuel. By necessity, a diesel driven submarine would have to surface every night to let the fumes escape from the submarine. Obviously, this was a detriment to the submarine since they could not operate in hostile territory unless they had the option to surface on a nightly basis.

When the nuclear submarines came along, it avoided this issue entirely. A nuclear submarine does not have to surface and can essentially be under water forever, if necessary. Most people are confused by how a nuclear submarine works. Basically, the nuclear reactor is only used to heat water and the steam then runs the engines of the submarine. If you can envision the old steam driven railroad trains in cowboy movies, you understand exactly how it works – except in this case, we have nuclear energy heating the water and not a fire on-board the train. Because a nuclear driven engine does not produce any fumes that are toxic to the crewmen, there is no necessity for the submarine to surface, and in fact, most do not during the entire tour at sea.

All of this dates back to the 1962 Cuban crisis, when the Russian government wanted to put nuclear missiles on the island of Cuba. They wanted to be close enough to attack the U.S. with on-land nuclear missiles, should the need arise. Now, such missiles are not even necessary. The U.S. Navy can shoot missiles from anywhere in the world from a sub that is totally silent and likely could not even be detected with today’s sophisticated tracing electronics.

I never truly understood what submarines did in the everyday world of the nation’s defense. In the movies you usually just see them torpedo boats and create havoc, but that is not their primary purpose. From the book Blind Man’s Bluff, you get an inside feel for what submarines actually do. Some of these tasks are almost inconceivable.

For example, during the Cold War with Russia, the submarines were used primarily as our eyes and intelligence service. Some of the risks that they took bordered on fantastic. One example cited by Blind Man’s Bluff was that a single submarine would leave San Diego and sail underneath the North Pole in order to reach Russian territory where the Russian boats and submarines were harbored. At 20 knots, this would take longer than one month. The U.S. submarine would enter the 12-mile legal limit of Russian property, and in fact, would even go within the illegal 3-mile border. The submarines would actually sit underneath Russian ships and subs and record conversations taking place. Envision the trip from San Diego halfway around the world in a submarine that would not exceed 20 knots at any time. Also, imagine being in a submarine for three months in an extremely high-risk environment where if discovered by the Russians would almost assuredly mean sudden death.

The various components of a nuclear submarine, like the USS West Virginia.

Another example cited by the book is that a submarine from the U.S. Navy went into Russian territory water and discovered telephone lines connecting the various land masses. Knowing that these telephone cables actually relayed confidential conversations between Russian boats and their superiors, a sub would actually come from the U.S., go into the Russian harbor and sit on the floor of the ocean to install wiretaps to these telephone lines. Given that these lines were essentially in the same harbor where the Russian boats were based, that was an extraordinarily risky venture. In addition, due to the high confidentiality of the mission, these subs contained an explosive system that would self-destruct (destroying the submarine and all of its crew) if discovered by the Russians. The Russians were absolutely amazed that the U.S. seemed to know every step taken by the Russian military during the Cold War. They clearly had no idea that every telephone conversation was monitored by the CIA thanks to taps installed by subs in their own backyard.

I learned a great deal over the last couple of weeks regarding submarines. Quite frankly, I guess I had never taken the time to really understand what submarines do and what an integral part they played during the Cold War. Basically, the Cold War did not end because the U.S. and Russia met a philosophical understanding regarding democracy and communism. The Cold War ended because the United States was far superior in its military capabilities and Russia realized they could never catch up. It is also very clear that neither country had a desire to launch an offense against the other. Now, Russia keeps virtually all of its submarines near their own shores in the Mediterranean Sea as defense, rather than offense, against the U.S. While I wish I could say the same for the U.S. submarines, based upon all of my research, it appears they continue to collect intelligence for both the military and the CIA. Whatever their purpose and mission is today, we as Americans certainly owe them a debt of gratitude. Every time I read that the government is trying to reduce the military force and cut funding going forward, I will always remember how important submarine warfare was in ending the Cold War. Also, I will remember how old the submarine fleet is getting without any attempt to update and modernize the existing submarines. Hopefully, a new philosophy regarding defense will improve upon that reality.

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

Best Regards,
Joe Rollins

Tuesday, October 10, 2017

Is this a great country or what?

We have just ended what is historically the worst month of the year for stock market performance. Not surprisingly, given the very strong markets that we have had for all of 2017, the S&P 500 was up a sterling 2.1% for the month of September - so much for this being the worst month of the year. In fact, it was the best September since 2013. The economy continues to grow, earnings continue to increase and interest rates continue to stay low. The components for future positive stock market performance are all in place.

I would like to talk to you about various aspects of the stock market performance and why I do not see a large downward shift coming anytime soon. I will illustrate what happens when the “Wealth Effect” starts to take over the higher end of the economy. We are now seeing this in the U.S. economy, and more importantly around the world, which should lift stock markets around the world higher. However, before I begin all of that terribly interesting information, I need to cover the performance of the markets through the first nine months of 2017.

Ava horseback riding in the mountains and building sandcastles at the beach - all in the same month!



As mentioned, the Standard and Poor’s index of 500 stocks was up 2.1% for the month of September and is up a very respectable 14.2% for the year 2017. For the one-year period ended September 30, 2017, that index is up double digits at 18.6%. The Dow Jones industrial average was up 2.2% for September, up 15.5% for 2017 and up 25.4% for the one-year period ended September 30th. The NASDAQ Composite index was up 1.1% for the month of September, 21.7% for 2017 and up 23.7% for the one-year period ended September 30th. For all of those forecasters that continue to forecast gloom and doom for the equity markets, they must be truly amazed to see close to 20% performance for all of the major market indexes for the one-year period. As the above numbers indicate, we have been correct in our insistence that one be fully invested during this highly profitable time.

I always like to illustrate what the bond index reflects given our projections that you are not likely to make money in a bond index portfolio. For the month of September the aggregate bond index was down 0.5%, for the year 2017 it was up 2.9%, and for the one-year period it was down 0.2%. Therefore, if you have been invested in bonds over the last 12 months, you have actually had a negative rate of return as compared to an almost 20% gain on any of the other major market equity indexes. Not much explanation is needed to see why we forecasted negative returns in bonds and positive returns in stocks.

Last month I wrote about how much happier my life has been since I quit watching the news. Don’t get me wrong – I keep up with current events, I just do not watch the editorials that try to explain them. The one thing that I do is make a concerted effort to look at what is going on around me rather than what people are telling me. I am convinced that a lot of commentators believe that they can influence the thinking of the population by slanting the news in a fashion that meets their agenda. I decided I would rather make those decisions on my own, and I feel much better about the world since doing so.

You have to admit though, when disaster strikes, this country steps up. Over the last couple months, we have had hurricanes in Texas, Florida and Puerto Rico along with mass murders and other shocking news developments. However, this country rallies at the time of disaster, and the response is overwhelming. Who would have ever believed that a defensive end for the Houston Texans would raise $20 million for hurricane relief by simply asking for it? When the federal government gets into disaster mode, the relief is overwhelming. They move in with housing, clothing, support and take care of thousands. Not to say there is not human suffering and, of course, financial loss, but the attempts to alleviate the basic discomforts of the disaster were in full exhibit over the last two months. What other country can you think of that has done so much to help the average person? We continue to help Puerto Rico due to the tremendous issues its government and infrastructure currently face.

While the financial news has been quite positive, the doomsayers still want to argue that the price earnings ratio of the markets continues to be at an unsustainable level. However, perhaps they missed that earnings have been so strong that the price of the S&P 500 has actually fallen lately. How is it possible that the price earnings ratio could fall when stock prices have increased almost every month in 2017? The simple explanation is that corporate earnings have gone up higher than the index has. As a basic example, the S&P 500 price index has risen 15.4% over the last one-year period ended in June, however the earnings during that period grew at an even faster rate of 18.1%. Therefore, if the index grew 15% and earnings grew 18%, based on simple arithmetic, the price earnings ratio would fall rather than go up.

Every day, we are confronted by forecasters who say the stock market cannot sustain a continued increase. I would agree with them to the extent to say that if earnings cannot keep up with the increase, then it is true that the markets cannot sustain this valuation. However, to this point, earnings have not only kept up with the index, they have exceeded it! I am always amused by those who like to report statistics to support their forecast that the earnings are going to go into free fall. They often point out that sales to earnings are declining. They also point out that book value is a multiple of valuation and our revenue per employees has fallen and that the dividend yield per stock is falling, rather than going up.

If you have read our posts over the years, I hope that you have learned a very important point. Stock valuation is very much like real estate. As it is said in real estate, the three most important aspects are location, location, location. In stock market performance, the three most important components of valuing a stock are earnings, earnings, earnings. Yes, in both sectors interest rates are important and the economy is important, however, the MOST important aspect of valuation is earnings, and earnings continue to move up nicely at the current time.

Yes, it is important to look at prior earnings, but the most important component of stock market valuation is future earnings. Just like the last 12 months ended June 30th saw an 18% increase in earnings for the S&P 500, forecasters now project an increase in earnings of an additional 18% over the next year. As long as earnings are moving up, it is highly unlikely that any one event (other than a geopolitical disaster) could move the markets down.

We are also seeing an all too obvious economy that continues to strengthen. Unemployment is now at a multi-year low at 4.2%. Literally, anyone who wants to work can get a job – it is just a matter of finding a job that suits his or her skill set. There is no shortage of jobs as “help needed” ads continue to pop up for unfilled positions. Now that we are operating at essentially full employment, the flow down of wealth is occurring at all levels. Each person that has a job supports other people in his or her household as well as their community with their income and spending. The compounded effect is that you are seeing all aspects of the economy grow in some respect. The strengthening of employment is by far the most important component to keeping the economy strong. At the current time, we are in a “Goldilocks environment” as it relates to employment since the unemployment rate is extremely low but not so low as to create a strain on the labor markets.

In addition to the good news on the economy, the tax cut policy is going to bring further economic growth soon. I even have to quote the famous Warren Buffett, who is clearly a democrat when it comes to economic terms, as he admits, “I think they can get it done (commenting on Congress). It is not a tax reform act, it is a tax cut act. Any politician that cannot pass a tax cut is probably in the wrong line of business.” I believe he is exactly right on this subject. How could any congressman not vote for a tax cut with the general election coming up next year?

The natural outrage of the progressive wing of Congress was that the tax cut would benefit the rich. First off, the rules are very basic – 50% of the population pays no income taxes whatsoever. You cannot cut income taxes on people who pay no income taxes. If you are to have a tax cut, it must (by definition) cut the taxes of the people that actually pay taxes – the higher paid 50%. The other explanation was almost laughable. The progressive wing of Congress expressed outrage that the tax cut would explode the deficit. Lest we forget, this is the same progressive wing of government that over the last eight years has accumulated deficits greater than each and every president in this country up until the last. So, if you need experts on deficit producing economics, the current progressive wing are your experts.

But I also see an opportunity for enlightening that is going to change America going forward. Even the most liberal of commentators realize that what the progressive wing of the party has been doing is a mistake. When it comes to progressive agendas, Bill Maher may be one of the most progressive. Recently, it was a shock to hear him say, “We need to get some Democrats elected, and that is hard when the movement to childproof the world has made the Republicans a party of freedom and the Democrats a party of poopers.” I think it is fairly clear what he is saying. You cannot overregulate Americans, as U.S. citizens will not tolerate it. All of us were wringing our hands about the Obamacare disaster, but the reality was a lot simpler. At its maximum, Obamacare only covered 13 million Americans out of a total of 330 million people in the U.S. Therefore, the coverage of Obamacare was 4% of the population. However, the rules and regulations that controlled Obamacare affected 100% of the policyholders of medical insurance. This type of regulation is not only nonproductive, but also a waste of economic resources. Finally, we have an administration today that is cutting needless regulations which will clearly benefit the economy going forward. Good news for the economy!

Also, for the first time in many years, I see the “wealth effect” taking place. The wealth effect is when the consumer feels confident enough about their job that they will use their gains in wealth to buy consumer goods. Every day you see investors taking money out of the markets to buy new houses, new cars, new boats and other assets. As the markets move higher and the confidence of the average investor is secure, there is a slippage in investing and a tilt toward consuming. I do not need to illustrate to you how useful this wealth effect will be in making the market higher. When profits from investing slip out into the economy, it puts more people to work, creates higher tax dollars for the government, and it makes the economy better. With gains now up over 20% for the last 12 months, the wealth effect will very much be a positive going forward over the next year. The evidence is as overwhelming as it is remarkable that more people do not see it. If you will notice, restaurants are full on Friday nights, construction cranes are everywhere and consumers are buying all types of goods at record levels. Those who do not see the positive economics of the current economy clearly have blinders on, but it is not just in the United States. Growth is occurring in Europe, Asia and around the world.

Recently, I read an interesting statistic that illustrated this point. Basically, it was a boring article on corporations’ dividends but it said that dividends would grow this year from the S&P 500 by 7.7%. That was interesting considering they grew the prior year at 4.8%, and therefore have grown 10% over the last two years. But the number that struck me was that the actual number of dividends paid by the S&P 500 companies was $436 billion in actual dividends. That is up from last year’s $404 billion. As most of you know, dividends are used by many investors as their income stream. If their income stream grew at 7.7% this year, and pumped $436 billion into the economy, the wealth effect will only further increase going forward. Just for reference, the GDP of Puerto Rico was $101 billion in 2012 – 25% of the dividends paid in the U.S.

In summary, things are great in the U.S. at the current time. There is no question that there are terrible events occurring around us, but the good is definitely out there. Those who think the economy is faltering clearly do not see what is going on around them. Until this changes or a geopolitical event that is unexpected knocks it down, I see nothing but further gains over the next 18 months. Yes, they may be muted to the prior gains but up is always better than down.

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

Best Regards,
Joe Rollins

Wednesday, September 6, 2017

I am much happier now that I do not watch the nightly news!

I have always been somewhat of a news junkie, going back to the late 1950’s when Huntley Brinkley had a 15-minute national news report on NBC. I even remember that day in 1963 when they expanded to a 30-minute show and wondering how they would ever fill up all 30 minutes with news. Compare that to today, where we have multiple 24-hour news channels and national news programs competing with headlines for entertainment value rather than reporting the news. I think the news is one of the reasons for the bad attitudes in the U.S, and, of course, that affects attitudes towards investing.

In college, I would try to find any television that was airing the news so that I could keep up with the Vietnam War and other significant events. But lately, I have completely given up on the news and will later explain why.

Before we continue this topic, I need to report on the month of August 2017. Going into August, we’re always apprehensive in regards to the performance of the broader equity markets. It is very important to understand that August is historically the second worst month of them all. It is second worst only to the month of September, which we are now entering. Any time that you have essentially a breakeven month as we did in August, you have to welcome the news. In fact, August was very much a good month for the growth sector of the equity markets, but a mixed market for the other indexes. Because of the poor performance of the oil sector and the oil stocks, most value funds were down significantly. Once again, small-cap stocks were a disappointment and down a couple percentage points during August as well. The real progress in the market during August was in growth funds and international funds. Fortunately, for us, both of these are our largest asset allocations at the current time.

To say that the financial markets have been on a positive run would be quite the understatement. For the month of August, the Standard and Poor’s Index of 500 stocks was up 0.3%. For the year 2017, it was up 11.9% and for the one-year period ended August 31, 2017, it was up 16.2%. The Dow Jones Industrial Average was up 0.6% for the month, up 13% for 2017 and up 22.3% for the one-year period ended August 31, 2017. As is usually the case, the NASDAQ Composite was up an excellent 1.4% in August, is currently up 20.3% for 2017 and up 24.7% for the one-year period then ended. As mentioned above, the small-cap stocks were down 1.3% for the month of August, up 4.4% for 2017 and up 14.9% for the one-year period ended August 31, 2017. Just to illustrate how poorly bonds have been performing compared to equities, the Barclays Aggregate Bond Index was up 0.8% for August, up 3.5% for the year 2017 and up only 0.3% for the one-year period then ended. As I have repeatedly pointed out, it is very difficult for bonds to make much money when we are enjoying all-time low interest rates with the direction of interest rates clearly up and not down. Regardless of what you read, it is just not an appropriate time to be investing in bonds at the current time.

As I have previously mentioned, including the 2017 year, the S&P 500 will have been up 14 over the last 15 years, with 2008 being the only year it was down. However, you would be absolutely shocked at how many times a day I am reminded of what a disastrous year 2008 was. Yes, I totally understand your concern; however, the S&P 500 is up a cool 265% since it bottomed out on March 9, 2009. How many people do you know who sold out of the markets in 2008 and have yet to reinvest? Unfortunately, we see a few every month that have not reinvested and are still paralyzed by the fear of another downturn. Given that your opportunity for making money over the last 15 years is at a 93% win ratio, I always wonder why those people refuse to take advice and remain governed by their own basic fear of investing.

Wilcox Family Beach Trip:
Partner Eddie Wilcox, Jennifer, Harper and Lucy


As mentioned in the title, I think a lot of this distrust of the markets is fueled by the negative news itself. Admittedly, I am a news junkie but even I have recently given up watching the nightly news. Quite frankly, now that I reflect back on it, I neither miss it nor do I feel deprived of current news. The turning point in my feelings regarding the news was very basic. Recently, one of the high-placed Trump officials either resigned or was fired by the current president. When I got home and turned on the news, it seemed that the news outlets were almost foaming at the mouth to explain this event. Of a 60-minute show, 45 minutes was devoted to the realization that this one advisor would no longer be part of the current administration. My reaction to the entire news event was, “Who cares?” – tell me what the news is instead of telling me how to evaluate it. I now seek the news through other outlets, where it is truly news and not implicit (but not labeled) commentary.

One of the most respected polls on investing, the American Association of Individual Investors, reports on how individual investors perceive the markets. It is amazing that the bullish sentiment of investors has been below 50% for a record of 138 straight weeks and currently sits at a very low level of 28.1%. To put this into perspective, for two and a half years only ¼ of those individual investors felt bullish about the market. They have also seen the S&P rise almost 30% over that timeframe while not invested. I have recommended time and time again that you remain invested despite such negative information from the news and, fortunately, my advice has been correct.

When many clients come in, they talk about all of the negativity in the world and why the markets are due a pullback. However, when they drive home, they see evidence all around them which contradicts such negative feelings. As I have pointed out the last few years, one of the major components of a strong economy is getting people back to work. The more people we have working, the more money there is to support businesses, and therefore the stock market. In the most recent week, unemployment reported that businesses have expanded their monthly payrolls for nearly seven years. Think about that for just a second. Every month, over the last seven years, businesses have added more employees than the previous month. Oh, and by the way, that happens to be the longest streak ever recorded of businesses expanding their payroll. Do you really believe that business owners would be adding more employees if they really felt that their business was turning negative?

Once again, we just finished a record quarter for corporate earnings. Interest rates continue to border on all-time lows and in fact they moved lower last month. The economy is strong and getting stronger. Every business reports that they cannot find enough qualified people to fill the positions that they have available. Even my own firm advertised continuously for qualified employees for quite some time and in some cases we did not receive a single qualified applicant for quite some time. This is happening all over America and yet unbelievably some investors feel that we are falling into a recession for reasons even they can’t explain.

All you have to do is actually look around to know that a recession is not likely. As I look out my window in Buckhead, I see construction cranes in every direction. I run across traffic jams at every part of town and yet they continue to build condominiums and apartments everywhere you look in Atlanta. Not only is business strong in the U.S., it is getting stronger around the world. I recently reported on my trip to Europe, but we are now even seeing positive GDP in Japan, which has been in recession for 25 years.

Since the first of 2017, the U.S. dollar has fallen considerably against all foreign currencies. That is not the fault of the U.S. dollar, but rather the increasing strength in foreign currencies. Due to the falling dollar against those currencies, the international mutual funds have well out-performed the U.S. funds. The majority of equity markets around the world have grown in high double digits, exceeding the low double digit growth of the U.S.

The nightly news reports endless tragedies around the world and 100% political discourse in the U.S. However, once again, the news misstates what should be obvious to every investor. While the current administration is certainly making positive gains in business, virtually all we hear of are the negative things they have done. I wonder if you have ever seen the news report that the Trump administration has withdrawn or delayed 860 proposed regulations by executive order. They have also overturned or delayed implementation of the business- unfriendly Obamacare. This is extraordinarily good news for businesses and employees in America. However, you would be hard-pressed to find even one word of positive economic evidence by watching the nightly news.

I am asked almost daily to reflect on when the next downturn in the markets will occur. I am happy to report that every selloff for the last nine years has been a buying opportunity. I read regularly that the market needs to selloff so new investors will come in and invest. However, if the same investors have been on the sidelines in one of the greatest bull markets of all time, you have to wonder what could possibly bring them in at this late date. Last month I reported on the top 10 most important topics of economic news. If you missed it, please refer to it here. As we finish the month of August and go into the fall season, I can report that each and every one of those 10 sectors is very much positive at the current time. Once we get through the month of September, the period of October through May is historically the strongest time period for investing. Therefore, it is likely that before 2017 is over we will see additional gains to an already sterling investment year.

Perhaps I am avoiding the obvious question that is probably on your mind. What will ultimately bring down this historically good bull market? Believe me, it is not political discourse or world events. Although hurricane Harvey was tragic and caused much public suffering, as much as it hurts me to say, it was a positive for the economy. $150 billion in anticipated rehabilitation costs for Houston will have a huge economic affect which will be forthcoming in the next 18 months. Yes, short-term negative, but a huge long-term positive.

Several clients approached me last month regarding the potential for war with North Korea. It is now reported that North Korea has a one million man standing army, but do you know what their army suffers through on a daily basis? Malnourishment. Yes, they have a huge army but cannot feed them. Additionally, China has cut off their gas supply into North Korea and now no country will assist North Korea by purchasing their goods and services. But to answer their question, rearming the military and providing the financial support of a short-term world war would clearly be an economic stimulus against a backdrop of huge personal suffering, very similar to World War II.

So if none of these things would lead to the downturn of the market, what would? Recession. Recession is the only one true 100% indicator of a negative market. When recession comes, the market will go down. We are currently at full-employment, experiencing historically low interest rates, with earnings at all-time highs and a worldwide boom as an increase in GDP. How anyone under any circumstances could project a recession from this overwhelmingly positive news continues to baffle me. As I talk with investors every day and they express the negative opinion that the markets cannot go any higher because they are at all-time highs, I ask them what economic event leads them to this conclusion. Almost universally, their opinion is based upon the negative national news (fake or otherwise). However, I hope you do as I do – take a look around and evaluate the economy with what you see and never form an opinion based solely upon the nightly news.

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

Best Regards,
Joe Rollins

Monday, August 14, 2017

It Gets No Better Than This!

Apparently, everyone is too busy to sit and read everything in the news these days so the format seems to have shifted to a more condensed, simplified version. Never wanting to be the square peg in a round hole, I too will adjust the layout of this blog and give you my top 10 reasons to invest. The first half of 2017 has been a great investment period, and those sitting around in cash must be regretting their investment choices. Before I move on to a much more interesting subject, I need to cover the first half of 2017 investment results.

The month of July was an excellent month, just as all of 2017 has been. During the month of July, the Standard and Poor’s index of 500 stocks was up a cool 2.1%. For all of 2017, it is up 11.6% and for the one-year period ended July 31, 2017 it is up 16%. The Dow Jones Industrial Average was up 2.7% for the month of July, 12.3% for the year and 21.8% for the one-year period ended July 31, 2017. The NASDAQ Composite was the best performer of the major indexes up 3.4% during July, 18.7% for the year 2017 and 24.4% for the one-year period ended July 31, 2017. All three major indexes have been significantly higher for the year 2017 and even higher for the one-year period then ended. Just for purposes of comparison, the Barclays Aggregate Bond Index was up 0.5% for the month of July, up 2.6% for 2017 so far, but down 0.7% for the one-year period ended July 31, 2017. As you can see, all of the major stock indexes were up double digits for the one-year period ended in July, while the bond index was down for the one-year period then ended. As I have been pointing out in these posts over the last few years, bond investing is currently counter intuitively more dangerous than investing in the stock market.

Look how fast they grow!

Ava (age 2)

Ava (age 6) and CiCi

Needless to say, the profitability of Wall Street has been staggering over the last few years. However, I did run across a quote that I found quite amusing. It seems that the cash held by the largest corporations in America today exceeds $2.2 trillion. One company, Apple, owns a staggering $261.5 billion in cash. Just to put that amount into perspective – that is more than the market value of 490 companies in the large-cap S&P 500. Let me try and explain it in layman’s terms so you can appreciate these amounts. If you spend $1 million of Apple’s money each and every day of your life, it would take you 716 years to go through this pile of cash. Oh, and by the way, that is assuming that your cash is earning zero going forward.

And now, my ten most important reasons why you should be invested are as follows:

1. Corporate earnings have been nothing short of spectacular. It appears that when this quarter is finished earnings will be up double digits over a similar period prior-year. This is coupled with a first quarter gain that also saw a double-digit increase. You very rarely see corporate earnings growing this rapidly with such a large base of corporations reporting. However, if there is one important thing that is controlling the upward projecting of the stock market, it is that corporate earnings continue to outperform.

2. Inflation, year over year, is virtually flat or gaining only a small amount. While this may not affect you individually, it is extraordinarily important from a monetary standpoint. With no inflation and a very strong economy, the Federal Reserve has no reason to increase interest rates any time soon. If we were in a hyperinflation mode, you would see the Federal Reserve increase interest rates to slow down the growth of the economy. We are clearly in a Goldilocks environment when it comes to inflation. Not too strong, not too weak – just right. At the current time, with inflation barely nudging up, I rather suspect that we will see only one and maybe no interest rate increases for the rest of 2017 and remain very low.

3. Compared to last year, the dollar has been falling in value for most of the year. When the dollar is falling, that means that U.S. corporations compete more favorably overseas, and therefore they have the opportunity to make more profits. It is believed now that of the Standard and Poor’s 500 Index of stocks, almost 50% of their sales are outside of the United States. With the dollar down, these companies can now compete with local manufacturers and is one of the principal reasons why corporate profits are up so significantly in 2017.

4. Congress is totally dysfunctional and that is a good thing! It has been proven by numerous surveys that the stock market does best when Congress just leaves it alone. The fact that Congress cannot get anything approved is very much a positive thing for the stock market. Some of the best years ever enjoyed by stock investing were during the President Clinton years. With a Democratic White House and a Republican Congress nothing got accomplished during that time. Now we have a similar Congress that cannot even approve a day off, and for those of us who do the investing, that is as good as it gets.

5. During 2016, the U.S. economy was strengthening as the year progressed, but the rest of the world was lagging far behind. And now, in 2017, there is a big change with Europe’s economy strengthening. For the first time since the 2008 financial crisis, Europe is growing again. As I pointed out in my last blog, I personally witnessed the strong economy in Europe with money being thrown around by consumers everywhere and for the first time in a long time, growth prospects in Europe is outstanding. Also, we are seeing a rebound in Japan and virtually all of Asia. We all know China has been productive for a long time, but now we are seeing both India and Southeast Asia growing by leaps and bounds. While the U.S. market is almost fully valued, there are many gains to be realized in Europe and Asia where stocks are cheaper, the economy is growing and the prospects for profits have rarely been higher. We invest where profits are found.

6. Interest rates continue to be extraordinarily low. We are still talking about 30-year mortgages on homes at less than 4%. As pointed out in many of these blogs that I write, interest rates have never been this low for so long. I do not anticipate that we will see a major downturn in the housing market until interest rates turn around and go in the other direction. It looks like that will be years away instead of months. Therefore, my projection is for all of 2017 we will probably only see one quarter point increase and probably only two rate increases for 2018. With such low interest rates, cash is paying virtually zero to income investors. Therefore, given the very low rate of interest earned by cash and bonds, seemingly to me, stocks are the only place to invest.

7. The economy is extraordinarily strong and is only getting stronger as we move through this year. The unemployment report was recently announced at 4.3% - this is the best rate in over a decade. Every time one person gets a job, they support many people around them. Not only their families, but also the corner drug store and other places where they spend their money. Every segment of the economy now reports that it is virtually impossible to find qualified workers and that is a really good thing for stock market investing. While the consumer is 70% of the U.S. economy, the more money you put into the pockets of consumers, the more likely they will spend that money. Frankly, it just does not get any better than this financially, to have a growing economy with low inflation, low interest rates and earnings that are going up.

8. We have a current administration that is thankfully killing government regulations with both hands. For years, the economy has been bootstrapped by a congress that defers regulations without thinking of the ramifications they will have on businesses. This president is eliminating regulations and freeing business to operate as it should. There is no question that the more regulations that are dropped off the books, the more likely corporate profits will continue to grow. This is a win-win for all Americans. Maybe I should tweet it!

9. Regardless of what you hear on television, read in the newspaper, or what you actually believe, tax rates are going down. This is not a policy that is wanted only by Republicans, but by all members of Congress. Everyone wants to cut tax rates for both corporations and individuals. It most assuredly is going to happen this year in 2017. The economic effects of these tax cuts will be enormous. Corporate profits will increase dramatically and the consumer will realize improved cash flow, giving them more buying power that is likely to be turned into commerce. I can hardly put into words how important these tax decreases will become. The stock market has every reason to stay up at the current time, but throw all the good news listed above on top of that and an income tax decrease and you will see enormous profit growth.

10. It defies imagination that more people are not talking about the repatriation of foreign dollars to the U.S. as it could single handedly change the American economy. It is also hard to believe that for the last decade Congress has completely ignored this potential source of revenue. If it does happen, which I believe it will, Congress will pass a repatriation tax of 10% rather than the current 35%. It is believed by many that there is at least $1 trillion to $3 trillion in overseas accounts owned by American companies. If they get the opportunity to repatriate that money back to the United States at a tax rate of 10%, there will be enormous good created by these funds. It is hard to believe how little congress has understood about this situation in prior years. The Democrats wouldn’t approve such a repatriation tax because according to them, American companies would only use that money to pay corporate bonuses and/or dividends to their shareholders. How naïve are they to not realize that both of those items create substantial income tax to the U.S. Treasury? Take it one step further and assume that 100% of the repatriated tax would go directly to infrastructure building in America. Just envision how many people would be put to work at really good, high paying jobs, if say $2 trillion came back at 10% and we had $200 billion of roads and bridges to build. If you then couple those jobs with the private sector providing much of the capital over the next decade you could have infrastructure spending of close to $1.5 trillion. Meaningful money for the economy and it is coming.

There you have it, my ten reasons why you need to be invested. Frankly, I could have written more. Nothing earth shattering and essentially the same facts that I have been pointing out over the last two years. With cash earning virtually zero and bonds appearing to be in a lost position, your best choice for investing is the stock market. I do not anticipate any change in that forecast for the next 12 months or so.

Once again, we invite you to visit with us. Due to the slow summer months, we have plenty of time to sit down with you and discuss the stock market, investing or any other subject you would like. Please call our offices and set up a convenient time.

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

Best Regards,
Joe Rollins

Tuesday, July 11, 2017

Fake News - Not Practiced Here.

I am a great admirer of Peter Lynch, the famous mutual fund investor. He has written several books on investing in the stock market, but the one that made the most impression on me pointed out that often times investment ideas, concepts, and/or economic realities seen every day are overlooked or ignored. I have found that to be true over and over again. So many people are influenced by the news (or so-called “fake news”) and pay no attention to the contradictory evidence around them. The economic aspects of the world are played out on the streets and within shops and construction companies, and should not be ignored.

I recently had the pleasure of visiting London, Paris and Edinburgh and have some thoughts I would like to share with you. So much can be learned about the world’s economic status by visiting some of the greatest cities in the world. I will share those reflections with you as well as my observations regarding economic reality in those countries.

I also want to bring you up to date on the unbelievably good economic reality we are experiencing here in the United States. All of the economic tea leaves are pointing in a positive direction. Of course, there are significant geopolitical events, but you cannot invest around “what might be”. You must invest based upon what you are looking at currently. It is important that you can differentiate between the fake news as reported on many internet services and national broadcasts, and the real economic evidence that is all around us.

First, I need to report on the month of June, which was basically a flat month. However, the overall six-month period ended June 30, 2017 was quite impressive. We have enjoyed a massive move up in the financial markets since the election of the new President, and all of the major market indexes were very favorable over this time period.

The Standard and Poor’s Index of 500 stocks was up 0.6% for the month of June and has enjoyed a 9.3% year-to-date performance and a one-year performance of 17.9%. Interestingly, the index was the lowest performing index over the major ones for the one-year period then ended. The Dow Jones industrial average was up 1.7% for the month of June and is up 9.3% for the year-to-date in 2017. It has also enjoyed a quite handsome 22.1% increase for the one-year period ended June 30th. The NASDAQ Composite was actually down for the month of June 0.9% but it is the best performing index up 14.7% year-to-date in 2017 and up 28.3% for the one-year period then ended. The top performer in the month of June was the small-cap Russell 2000 which was up 3.5% for the month of June, but has had a disappointing year in 2017 up only 5% for the year but up a very handsome 24.6% for the one-year period ended June 30th. The Barclays aggregate bond index was negative for the month of June, up 2.2% for the year-to-date, but negative for the one-year period ended June 30th, a 0.6% loss.

Paris

Edinburgh

London

Economic news has turned out to be very good in 2017. On Friday, they announced the June employment numbers and they were quite extraordinary. Nonfarm payroll had expanded by 222,000 in the month of June and the jobless rate was fixed at 4.4%. As we have mentioned often times in these postings, unemployment of 5% or lower would by all standards define full employment. There is also much going on in the interest rate cycle that is affecting fixed income investors. The Federal Reserve has recently expressed their concern about a stock market that continues to go higher and has reflected that they would like to increase interest rates dramatically as the year goes on. Of course, they counter that with the opinion that if inflation does not increase and the job market stays reasonable that interest rate increases could be delayed longer than this year. It is very clear to me that the Federal Reserve has a high desire to increase interest rates and is likely to do so by the end of this year as well as a couple of times during 2018. However, even at this level, interest rates are still extraordinarily low and it is unlikely that there would be any major effect on the equity markets until interest rates were well above 3%.

However, there is great displacement occurring in the credit markets (bond investing). As an example, this month the benchmark German 10-year bond yielded more than double from its recent lows. It is now an 18-month high at 0.58% as of this past Friday. Please note that although the German 10-year bond has doubled in recent weeks, it still has a yield of only one half of 1%. If those types of yields do not encourage stock market investing, nothing else will. Likewise, in the United States, yields have jumped up dramatically on our 10-year treasury bond, and, as of last Friday, closed at 2.39%. What is important to understand regarding this 10-year treasury is that almost exactly one year ago the treasury was yielding a lackluster 1.37% and in that one-year period has moved up to 2.39%. Despite how much you know about the credit market and bonds in general, interest rates are usually a good indicator of future economic activity. As interest rates increase, a stronger economy is being predicted, so the Federal Reserve tries to slow it down to a more reasonable level. This upward movement of interest rates also tells you that a recession is unlikely.

There has been much in the news lately regarding fake news. Every morning when I get up and read the headlines on Yahoo, I am just blown away. Did you realize that when President Trump has people to the White House, he gets two scoops of ice cream and everyone else receives just one? Really?! Now, that is the type of news that can really move the needle economically. I read almost daily on this website that the number of people in America that would like the President impeached is greater than his approval rating. I am not exactly sure where that survey was compiled, but I am willing to bet that its authenticity is in question. But again, maybe it is these headlines that are so confusing to the investing world which creates the uneasiness that investors feel.

It is much more important to look around you and see the economic reality of what is actually going on as compared to what is reflected. There is nowhere in Atlanta that traffic does not dictate your every movement. Everywhere you look, construction is ongoing, even in downtown Atlanta. This would not be the case if economic activity was down.

I just got back from London and Paris and both of those cities are covered up by tourism. Around Westminster, you can hardly walk the streets due to the number of tourists visiting. In Paris, the line to tour the Eiffel Tower winds around the block. Everywhere you look, tourists control ever restaurant, hotel, museum, and tourist attraction. Despite what you might suspect, the fear of terrorism is not deterring visitors from all over and the tourism industry is continuing to boom. It does not take a rocket scientist to realize that tourism would not be at all time levels if economies around the world were not in strong economic conditions.

President Trump recently criticized Germany’s Chancellor, Angela Merkel, by exclaiming that Germany was not a good trade partner with the United States. Of course, as always, the press widely criticized our current President with the exclamation that Germany was a strong ally of America and any criticism of Angela Merkel was sexist, uninformed or just downright nasty. I am here to tell you that I saw with my own eyes that President Trump was correct. If you drive around Atlanta, you do not have any problem finding an overwhelming supply of international cars. Mercedes, BMW, Volkswagen, and of course the Japanese automobile makers probably sell 50% of all cars actually sold in the U.S. However, in London and Paris, you see zero American cars. There are no Fords, Chevrolets, Buicks, or any type of American cars in London and Paris. Virtually all of the cars are either European made or are from Japanese manufacturers. That is exactly the point that the President was making, which was missed by the general press.

The point is that it is perfectly okay to import cars into the United States, but you must let us export them to Europe. If you are going to restrict our cars coming into your country then we must restrict your cars from coming into our country. It is such a basic concept that I am amazed anyone would have an issue with it. We are not talking about open trade – everyone votes for open trade. What we are talking about is equal trade. If you charge our goods a tariff, we will charge your goods a tariff – and frankly, it is already happening.

Around the world, companies are looking to come to the United States to manufacture since there will be obstacles put in place for countries that do not trade fairly. The fallout of this will clearly be a benefit to American employees as you will see more manufacturing jobs in the United States. The President recently announced plans for exporting liquefied natural gas to Poland. It is hard to fathom that anyone could criticize us exporting natural gas, creating fabulous new jobs in America and providing Europe with a commodity they desperately need at a competitive price. These types of subtle changes in the way business is transacted will greatly enhance America’s economy in the upcoming years.

As for the stock market, it would not surprise me to see flat summer months. We have had an extraordinarily good run in the last six months but a flat summer would certainly not be surprising. However, I feel very strongly that the market will end up higher at the end of the year than it is today. Almost every day I am approached by investors who want to know about the ultimate pullback. First off, there is no economic news anywhere to support a pullback. Yes, there are geopolitical concerns that none of us can forecast and certainly none of us can invest for going forward. However, if the economy is an indicator of the stock market, there is clearly no downdraft in place.

There are so many investors that have missed this run up in stocks who are dying to get reinvested. When you see a 20% return over the last year and you have been sitting in cash for that one-year period, the last thing you want to do is admit that you have missed a major financial opportunity. If the market would pull back 3-5%, it might actually give these people back into the markets and they would jump in and be fully invested. I am sure it sounds strange to hear me say a correction is a good thing, but at the end of the day maybe a small pullback could lead to a larger move forward in the coming months.

As we close the second quarter of 2017, it appears that the earnings are projected to be up roughly 8% on the S&P 500 Index companies. That is after a 15.3% increase year-over-year in the first quarter’s earnings. It was recently announced that the GDP growth for the first quarter was 1.7%. It is difficult to perform an analysis that would not make you believe that the GDP for the second quarter would be closer to 2.5%. And we are not the only ones enjoying prosperity. For the first time in a decade, it appears that Europe is going to have a positive solid GDP growth. Japan is also higher and Asia, as a whole, is on fire. The one thing that will always baffle me about investors is that they focus on relatively minor news to form economic forecasts when it is very simple to focus on the following three questions: Are interest rates still low? Are earnings still good? Is the economy solid? As pointed out above, all three of these major market forecasters are very much positive at the current time.

I could write a whole blog regarding dangers to the U.S. economy. However, none of those dangers are things that we can forecast today. What we can forecast is what the economic cycle is at the current time. Might there be recessions two to three years out? Of course, there might be, but that would give us a long time to react with your investments between now and then. For the current time, the market appears to be stable and moving higher. I always wonder how people who have sat in cash for the last couple of years justify that position. I guess that is the old thought that you can justify your actions with some sort of negative assertion. However, unequivocally they have been mistaken. As always, we invite you to visit with us so we can make sure you are on the right path to meet all of your goals.

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

Best Regards,
Joe Rollins

Tuesday, June 6, 2017

Sell in May and Go Away - but where are you going to go?

Josh and Ava

Reid and Caroline,
Children of Robby Schultz, Partner of Rollins Financial,
and Danielle Van Lear, Partner of Rollins & Van Lear.


The saying above has been around since I started reading the Wall Street Journal in the 1970s. The presumption was that the best traders on Wall Street would sell in May and go to their Hampton resorts and sit out on trading for the summer. They would come back after Labor Day and get reinvested going into the end of the year. There were many that argued that the best months in the stock market were always November through May because this was when the active traders on Wall Street were around to cut deals in back rooms and invest in stocks.

Those days are long gone. Now, momentum trading occurs daily. Millions, if not billions, of shares are traded by machines that exploit pricing errors on stocks, and are thankful for a gain of a cent or two. In fact, the vast majority of all shares traded on all major exchanges are done by momentum traders, not human traders. I do not say that with criticism of these investors as I have studied and read books on the subject, and I can find no real harm that they cause. In fact, they even may provide a service. They move markets and stocks when there isn’t enough volume to do so. One thing is crystal clear. The old days of stock traders cutting deals in the back room to exploit the market for their own benefit and against small investors like you are as dead as the old proverbial buggy whip. That is a very good thing.

Once again, I have to report that the month of May was an extraordinarily good month for investing. The Standard and Poor’s Index of 500 stocks was up 1.4% for the month of May and up 8.7% for the five months ended May 2017. It is also up 17% for the one year period ended May 31, 2017. The NASDAQ Composite was up a banner 2.6% for May and is up 15.7% year-to-date. For the one year period, it is up a sterling 26.7%. The Dow Jones Industrial Average was up a meager 0.7% for the month of May, 7.5% year-to date and up a very strong 21.2% for the one year period then ended. Just for purposes of comparison, the Barclay’s Aggregate Bond Index was up 0.7% for the month of May, 2.2% for the year-to-date and 1.4% for the one year period ended May 31, 2017.

To answer the title of this blog, I thought I would go through a few asset classes to see if I could solve the age-old question, “If you sold in May, where would you go?” What is interesting now is that the economy is starting to pick up and the anticipation of lower tax rates, capital improvements to our roads and bridges and the expatriation tax are all fueling the market higher, contradicting the so-called “experts” that you see daily on the financial news.

Let us briefly look at the other asset classes:

1. Cash – Over the last several months as bond rates have increased, the earnings that money market cash accounts earn has gone up. About this time last year, cash was earning virtually zero, but now it is up 0.8% annualized and roaring ahead to a 1% annualized yield. Just for comparison, I would point out that the S&P 500 Index made 1.4% for the month of May, nearly twice the current rate of cash on an annualized basis. However, most people that are holding large cash balances are not doing so in money market accounts. They do so in non-income producing checking accounts under the misguided presumption that you need an emergency fund. That may have been true in the days before lines of credit on your house, credit cards and other investment accounts were around to provide a safety blanket. Holding cash in a non-interest-bearing money market account at the current time has no economic benefit.

2. Residential Real Estate – I am always baffled by people who obtain wealth suddenly want to own real estate. It could be for a number of reasons for their wealth such as inheritance, sale of business, life insurance or other new-found wealth. The one thing they almost always purchase is more residential real estate. I never understood why a couple would need a 10,000 square-foot house in the $5 million range. First off, someone would have to clean that house, which would be expensive. Second, the number of people that can actually afford that house is virtually nil. However, that is the first thing that wealth seems to want. It actually goes back as far as Gerald O’Hara’s famous quote to Scarlett in Gone with the Wind, “Why, land is the only thing in the world worth working for, worth fighting for, worth dying for, because it’s the only thing that lasts.”

In any case, residential real estate is currently borderline bubble territory. There is very little available residential real estate to purchase, and what is available to purchase is extraordinarily high-priced. As with every residential real estate boom and bust that I have seen, just as prices reach high levels, contractors flood in to build homes to satisfy this desire. In my 40 years of living in Atlanta, I have seen many residential real estate booms and busts. Almost invariably at these levels, you see the supply of houses increase and the value of houses decrease. The law of supply and demand. I am not suggesting that it would happen overnight, or even in the next few years. But I do know when the price of houses gets so expensive that the average homebuyer cannot afford to purchase, you are at the very top of the market and there is likely to be a downward trend for years to come. So, we are today.

3. Bonds – Every day I talk to clients about investments and bonds. You will find countless textbooks that say you should be invested in bonds based on some hypothetical age – however, I beg to differ. The Federal Reserve has already announced that there will be at least three interest rate increases during 2017. Currently, interest rates continue to be at all-time lows with a current 10-year Treasury note at 2.16%. But we also know that the labor market is outstanding, the economy is growing significantly and that the Federal Reserve is moving interest rates higher. At the current time, the position in bonds is more likely than not to produce a negative or marginal rate of return in the upcoming year, as it has over the last one-year period.

4. Commercial Real Estate – Of all the asset classifications in the real estate arena, commercial (non-residential) real estate probably has the greatest potential. Rents are just now beginning to catch up with the economy and are likely to increase. Since the average investor cannot invest in commercial real estate except through other entities, I will not bother to discuss these in greater detail.

5. REITs, Hedge Funds and Oil Pipeline ETFs – REITs have had an incredible run over the last year, but that has ended. With rising interest rates and the beating that retail shopping centers are currently taking, it is not likely that REITs will have much of a return going forward. Hedge funds, by all standards, have been a tremendous bust. Even though I review the reported results of hedge funds on a daily basis, most do not even come close to the financial returns of the S&P 500. In my opinion, the oil industry is going to be slow-growing for years to come. The advancement of technology in oil has revolutionized the industry, and going forward, the demand for oil will be well below the supply produced by the companies that frack oil in America. There is a great amount being done with Hybrid cars. Increased mileage and no need for oil coupled with the oversupply of oil around the world, I suspect to see oil prices depressed at this level for at least a decade. I am not surprised at all that some of our friends in the Middle East are suffering from an economic meltdown. We knew it was going to happen at some point, but no one expected it would last this long. And now they too are suddenly cutting corners and pinching pennies. It could not have happened to a nicer group of investors.

As for the stock market moving forward, there is excellent potential. As the first quarter comes to an end, earnings for the first quarter on the S&P 500 were 14% higher than the same quarter last year. The much-respected Federal Reserve Bank of Atlanta is now predicting the GDP growth in the second quarter will be 3.4%. Didn’t I just hear on T.V. last week from almost a consensus of democratic congressmen that 3% growth was unattainable?

The unemployment report from last Friday was nothing short of spectacular. With an unemployment rate of 4.3%, almost all of America is now fully employed and when you have employment, you have consumer spending. Basically, the U.S. economy is at full-employment and throughout the U.S., employers are reporting the lack of qualified employees to fill positions. Of course, there are isolated pockets of unemployment, but in the good manufacturing markets, unemployment is down close to 3.5%. Something is going on in manufacturing that no one has forecasted and can only be good for the stock market.

You may remember that many forecasters said that Hillary Clinton was a “slam dunk” to win the election. I might have even said that myself. One of the things that they all agreed upon was that you could not stop illegal immigration in the United States. I guess the news that illegal immigration has slowed to a trickle into this country would be surprising. It is interesting to me that it was not necessary to build a wall, but to simply enforce the laws that currently exist.

The rest of the world is rushing to manufacture in the United States. There is a simple reason that the current administration continues to enforce fair trade rather than open trade. Over the next ten years, we will see an explosion of foreign manufacturers in the United States in order to avoid tariffs, making the manufacturing outside of the United States unprofitable. This is a great thing for the U.S. and for U.S. employment.

Therefore, the three important components of higher stock prices are clearly and unmistakably in place. Interest rates continue to be extraordinarily low and earnings appear to be excellent and getting much better. Most importantly, the economy is strong and getting stronger. Therefore, the trifecta of economic importance of higher earnings is firmly in place, and I expect the market to trend higher going to the end of the year.

Every day I meet with potential investors who state that they do not want to experience another year like 2008. Believe me; I would not want that either. However, if you look back at the economy in 2008, which was experiencing a financial meltdown, as compared to the economy today, how could you even contemplate that the stock market would perform at the same levels? Back then, the economy was fragile and breaking; today, it is strong and soaring. There is zero comparison between 2008 and 2017.

This morning, I heard someone on T.V. exclaim that it would be hard for the market to rise since there is such a high percentage of financial resources allocated to stocks. Actually, the exact opposite is true. In 1998, 60% of adults in the U.S. were invested in the stock market. In 2008, 65% of those adults were invested. Yet today, less than 54% of the U.S. population is invested in stocks. There is an avalanche of money, cash and resources that will come into this market over the next few years. This will create a backstop for any swift decline. While you will certainly see swings up and down as we move forward, I fully anticipate that over the next year markets will be higher than they are today. The one thing I am confident about is that if you have a 20-year period before you actually need the money, the markets will be significantly higher than they are today.

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

Best Regards,
Joe Rollins