Wednesday, March 29, 2017

It is happening... The truth behind fake news.

I intentionally held up the posting of my newsletter for February just so I could evaluate the economic news associated with the political slugfest that is ongoing these days. In this posting I am going to give you a lot of good news about the economy and what we should expect going forward. It is important to understand that so much of the information that we receive is tainted by the political bias of the writers. Sometimes, you have to go through several levels of very tedious economic data to understand what is truly going on. If you are guided by the overwhelmingly fake news that appears in so many of the publications that I read, then yes you will be terribly misinformed. The news is good!

Ava's Ice Skating Competition

Snorkeling in Mexico - February 2017

Vacation in Cancun - February 2017

The stock market was nothing short of spectacular during the months of January and February. The S&P was up 4% during the month of February and is up 5.9% for the two months ended February 28, 2017. More importantly, it is up 25% for the one year ended February 28th. The Dow Jones Industrial Average is up 5.9% for the 2017 year and 29.4% for the one year period. The NASDAQ Composite is up for the two-month period 8.4% and is up a sterling 29.4% for the one year period then ended. In comparison, the Barclays Aggregate Bond Index is up 0.8% for the two months ended in February and is up 1.2% for the one year ended February 28, 2017. You do not have to be a rocket scientist to see the trends in the above numbers. Clearly, bonds are trending down and stocks are trending up.

I am not a big advocate of reviewing past history in order to predict the future. There is the old Wall Street axiom, “You can’t see the future through the rearview mirror.” I did, however, find the following from Sam Stovall, a long-term market watcher, particularly interesting. He indicates in a current writing that since 1945, there have been 28 instances where the S&P 500 has registered gains in both January and February. In those 28 cases, 27 have ended the year with a total positive return. All of that is pretty interesting, but what I find most intriguing is that of those 27 instances where the market was up in January and February, the average gain in those years was 24%. I recognize that you cannot rely upon history for future performance, but let us hope that particular example is close to correct.

I thought in this posting I would list current economic discussions in order to give you a better idea of how positive things have become, from an economic standpoint. With the press being overwhelmingly critical of the Trump administration, there has been some positive economic news that drowns out the negative drumbeat of fake news. I think this economic information transcends political correctness, regardless of your political views.

1. OBAMACARE. Last week, the changes to Obamacare went down in flames, and frankly that is nothing but a good thing. The bill was flawed with problems from the very beginning. It was poorly constructed and no one ever gave it enough thought before passing it along. If you consider that only 13 million have Obamacare (the Affordable Care Act) as compared to 330 million people in the United States, it is a subject hardly worthy of conversation. In fact, due to the changes in Obamacare, we disrupted insurance of 250 million Americans with insurance in order to benefit 13 million. In addition, we created a monstrosity of governmental inefficiency, showing bureaucrats at their worst.

We should learn by our mistakes and fix Obamacare by making it simple. It would have been much less expensive to put in the two provisions that everyone likes about Obamacare, which include coverage of preexisting conditions and keeping your children on the policy until age 26 than going out and buying a medical insurance policy from the private enterprise for these 13 million people. All of Obamacare could have been easily eliminated by using the private sector, rather than the public sector, to provide insurance to these people without current insurance. Going forward, we must sell insurance across state lines and remove all of the political obstacles standing in the way of cheaper health insurance.

It was a good deal for everyone that the proposed Obamacare changes failed because the bill itself will implode shortly. It is so poorly constructed and so poorly executed that within a couple of years virtually no one will be covered by the plan anyway. At that point, we will be free of throwing additional money at a losing concept and actually begin to cover these people in the private sector. Regardless of your political view, this is a win-win situation for all and it is a clear undisputed benefit to the Federal budget.

2. TAX CUTS COMING. One of the major benefits of the Obamacare failure is that now, rather than later, we can move on to more important things, like tax cuts. Compared to the contentious nature of Obamacare, which political party would not want tax cuts? I expect this debate to be relatively short and approved before the end of the summer. The tax cuts that are instituted will have a major effect on increasing the American economy. This is very much a positive for both investing and your wallet.

3. REPATRIATION OF INTERNATIONAL FUNDS. It has not received much publicity lately, but the money coming back from overseas could be in excess of $1 trillion. This money coming back to the U.S. will create a lot of positive economic benefits. Dividends will be paid by U.S. corporations, which will increase income taxes, and buybacks will occur which increases the value of the stocks and creating income taxes from the sale of those stocks. In addition, if there is a 10% repatriation tax, that alone raises $100 million in immediate taxes that would be payable. There are so many benefits to this bill that I am almost shocked that it was not approved a decade ago.

4. WORLD ECONOMY IMPROVING. Don’t look now, but the rest of the world’s economies are improving. For the first time in many years, we are seeing the Chinese economy pickup despite the Trump administration’s threats to China. You do not have to read the official GDP reports to see it happening. Rail freight is up 10.4% in China year on year. Electrical production is 8.5% higher year over year. Domestic credit growth is growing at 9.7% year over year. Those numbers are not to be refuted. The economy and GDP in China is clearly going up – regardless of what the press says.

We are also seeing a positive explosion of the economy in Vietnam and almost all of Latin America is operating at full capacity. Even in Europe, the economy has turned positive and for the first time in decades, Japan has a positive GDP to report.

It can even be said, and many would agree, that as the U.S. economy grows, so grows the rest of the world. What clearer example could we have than 2008? While the U.S. fell into serious recession in 2007 and 2008, it has come roaring back since. Other countries that also felt that recessionary cycle are now clawing their way back into positive economic growth. If you do not believe that the U.S. is the economic engine to the world, then you have not closely studied the competitive analysis showing that parallel.

5. THE U.S. ECONOMY. There is so much positive occurring in the U.S. economy that it is hard to believe that the major market reporters cannot explain it. Maybe that is fake news in the making. The unemployment report recently indicated that unemployment was down to 4.7% during February, and for all the right reasons. There were more people participating in the work force and finding better jobs. As I often mention, for every job created, roughly eight new people are being supported in the economy. That one job not only creates support for the worker’s family, but also supports the local grocery store, hardware store and others. The compounded effects of even one new employee have an incredible economic impact. That is what is happening now as we reach full employment and the economy continues to strengthen.

Did you realize that, percentage-wise, there are fewer vacant homes in the United States now than ever? In 2006, there were 17,000 vacant homes in America. At that time, the U.S. population was 298 million. Since that time, the population has grown to 323 million, an increase of 8%, yet there is the same number of vacant homes today as there were then. If you look at all the demographics of home building, the construction of upscale homes is certainly the trend. However, the inventory of starter homes necessary to meet the needs of the mass population growth has yet to begin. You will see an explosion in growth of lower priced homes to meet this demand over the next decade. This increase in construction will drastically increase the number of people working in home construction and will strengthen the economy. The fact that the American population is getting richer along the way means there will be more wealth available to purchase luxury goods, increasing the economy even further. It is estimated by the Federal Reserve that from the start of the real equities bull market during the first quarter of 2009, America’s wealth has grown by a cool $38 trillion. Yes, trillion not billion. This growth is not only in equity prices, but also real estate values and other assets.

There is no question that by economic standards the stock market is high. But it certainly will not go down as a euphoric market. As I sat down to begin this blog, I read three articles on Yahoo expressing the dire possibility that the financial markets could drop as much as 60% over the next 12 months. Such basic cynicism is certainly not a sign of market euphoria. We now know that corporate earnings for the fourth quarter of 2016 were roughly 23% higher than the previous year, and there are many who are projecting earnings will be 25% higher for the first quarter of 2017, compared to the same quarter last year. The current valuation of the stock market, while high, neither comprehends nor includes projected earnings increases. If you were to map out this type of earnings growth, the U.S. market would actually be considered undervalued. If, in addition to undervalued earnings, you were to assume a large income tax decrease, as proposed by the current administration, the market could go much higher. While none of us are certain what the future holds when it comes to legislative matters, the evidence is clear that earnings are improving not only in the U.S. but also around the world.

As you broaden the base of the middle class in China, Mexico and Southeast Asia, you will improve earnings in corporations in all of those countries. I recently returned from a trip to Mexico, south of Cancun, where I have been going for over 30 years. There is overwhelming evidence that the economy in Mexico is improving and the standard of living as a whole has improved dramatically as well. In this part of Mexico, there is a clear middle class that has evolved from an area that 25 years ago, was filled with poverty and no hope for the future. Since hospitality is the primary form of economic improvement in this area, you could probably thank the Americans for a great deal of this improvement. But it is happening around the world. Economies are getting better everywhere, which will lead to higher stock prices.

In summary, we have the trifecta of good economic news. Interest rates, while going up slightly, continue to be outrageously low and not likely to go up much going forward. Earnings are improving around the world, which will lead to higher stock prices. The economy is stabilizing, growing, and in the rest of the world, the economies are growing with us. If you add those three components to a U.S. administration that wants to improve the economy and grow it instead of regulate it as the prior administration did, you will likely see significantly higher prices in the future. It will not and should never be thought of as a straight up projection. There will be ups and downs, starts and stops, but if you invest rather than speculate, you clearly will see higher stock prices in the future. I could write so much more positive news, but for the sake of your boredom, I will recite them next time.

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

Best Regards,
Joe Rollins