Thursday, November 11, 2021

You’re Totally Misreading the Supply Chain and Labor Shortage Statistics - Good News is Everywhere!

From the Desk of Joe Rollins

I watched in amazement as the media distorted financial information based on an uninformed reading of the above statistics. I never really know whether this misinformation is due to the lack of intellect in economic terms or maybe there is a political motivation to their lack of clarity. This month was a really good example of how the media misinterprets information and unfortunately misleads investors.

I told you last month that October was the scariest month of the year for reasons other than Halloween. It is a month of extraordinary volatility and sometimes major corrections. How surprised were we this month to have an extraordinarily profitable month of October in the face of staggering misrepresentations of economic data?
Father + Son - Josh & Joe at the World Series
I really want to cover some subjects that the media is misleading you on and I also want to reflect on the ineptness of Congress and how they are misleading you on current legislation. I want to into words the economic damage that they are trying to force onto the American public. Hopefully you will find this information as interesting as I do. But before I cover all of those interesting topics, I must report on the stock market performance for the month of October. It was quite a remarkable month all around.

The Standard and Poor’s Index of 500 stocks was up nicely at 7% for the month of October and for the year 2021 is up 24%. For the one-year period, that index is up a very satisfying 42.9%. The NASDAQ Composite was up 7.3% during October and year-to-date is up 20.9%. Like the S&P 500, it is up 43% for the one-year period then ended. The Dow Jones Industrial Average was up 5.9% during the month of October and for the year 2021 is up 18.8%. The one-year performance on the Dow Jones Industrial Average is 37.7%.

I always like to compare stock market indexes with the bond index just so you have a reference point to the different asset classes. The Bloomberg Barclays Aggregate Bond Index was absolutely zero for the month of October and for the year 2021 was down 1.7%. The one-year performance on this bond index was -0.4%. As you can tell the major market indexes were at a minimum of 37% for the year while the bond index was a negative. I often think about this bond index when I see the recommended asset classification by other advisors. I saw one this week that was most distressing. An advisor put 70% of a portfolio in bonds for a client that was in their early 50’s. I really do not know whether that allocation to the bond index was due to a lack of intellect or just a misunderstanding of the economic circumstances today. Anyone that would allocate a 70% allocation to a bond index which will almost assuredly lose money over the next year is certainly not doing their clients a service.

Over the last several months there has been constant talk in social media about how ending unemployment benefits was not helping the job market. Basically, these articles were stating that the employment situation in America had not improved after unemployment benefits were stopped in most states. That is absolutely, unequivocally, incorrect yet the article stated otherwise. It just goes to show that nobody fact checks social media and when you classify anything as an opinion, you can rest assured there is some agenda behind that opinion. The evidence is clear that ending extended unemployment in the United States has greatly increased employment. While it seems so intuitive to think that would be the case, many have argued the opposite.
Reid Schultz, Age 6, with his pit crew
The unemployment report for the month of October clearly illustrates this economic reality. This is the first job report that actually included the entire period not covered by the extended unemployment in the United States. The report showed private payrolls jumped 604,000 during the month and the unemployment rate dropped from 4.8% to 4.6%. While that was certainly good news for employment even better news was that for the months of August and September, jobs were increased by 235,000 from the reported totals. They were a lot of reasons why employment was better in October, but undoubtedly the fact that the virus counts have dropped dramatically have certainly helped. Kids going back to school and childcare freed up a lot of people to go back to work that previously were not. But there is no question that cutting off the pandemic unemployment programs including the $300 federal bonus and the 79 weeks of eligibility versus the normal 26 weeks, have forced people off the government payroll and back to private employment. This is very good for America.

We have not yet reached the unemployment rate of 3.6% that we enjoyed prior to the pandemic but clearly, we are headed in the right direction. If you want a sign of how far employment has come, just take unemployment in the city of Atlanta. In September of 2020, the unemployment in the city of Atlanta was 7.3%. For the month of September 2021, the unemployment in the city of Atlanta was 2.6%. It is almost impossible to get unemployment down to zero. There will always be some people that are unwilling to work, regardless of their financial circumstances.

I sat down and I read all the reports regarding the unemployment in October. For the most part, the articles raved about how good the report was, but there was this underlying contentious perception that somehow the numbers were distorted because the participation rate was only 61.6%, which was the lowest level since the 1990’s. Basically, that means that of all the workers that were available to work, only 61.6% either had a job or were looking for a job. At the current time, there still remains 10.4 million posted job openings and the number of unemployed people in America is 50% of that number. There are many reasons why certain people do not go back to work, but why anyone would consider that to be a negative is beyond me.

If American citizens want to stay out of work, for whatever reason, that should not form a negative reflection on the economy. There are many reasons why they do not want to work and why we care makes no difference. I am of the opinion that these people that do not want to participate in employment have their own issues and we as investors should ignore this particular economic reality.
Austin, Dakota, Joe, & Shelley - chilly night, hot win for the Braves
A good example of how the press misinterprets economic data is the current supply chain and labor shortage issues. There is no question that these issues have slowed down production in the United States and have created delays in delivering product. But it is not a negative. You have to realize that the real reason that we are facing these issues is a demand surge unprecedented in the United States. We had a period of 18 months where people were restricted from buying, traveling, and doing things that they want. When the negative vail of the Covid-19 shutdown was released, there was an unprecedented surge to buy. We were seeing it throughout all phases of the economy. And that is a good thing.

There is a shortage of new cars. There is a shortage of used cars. There is a shortage of hotel rooms in resort areas. Americans are buying like “drunk sailors” in every phase of the economy. Resort properties and mountain homes have essentially doubled in value over the last several years. It is reported that Hawaii has virtually no hotel rooms available during the upcoming holiday season. Las Vegas has reported records unprecedented and even larger than the pre-pandemic. Everywhere you look there is a shortage because of the extraordinary post-pandemic demand and available cash.

As I reflect on the things I have written above, maybe you can understand why the media misunderstands this concept. While certainly all of these are problems, they fall into that “high-rent” district problem of a good thing. Americans would not be traveling, buying, and investing if they did not have money. This surge in demand is created by tons and tons of government money forced on American citizens during the pandemic. Since people were restricted in what they could do, travel, and purchase, they just waited until they got the green light. Once they started spending, the supply chain just could not keep up. It is not a negative that all these supply chains are backed up, it is very much a positive. People have money and they are using that money for additional consumer items and pleasure traveling.

While business travel is not back to pre-pandemic levels, leisure travel has exceeded it. I have not been on an airplane in over a year that was not filled to capacity. Unfortunately, I travel a lot and the airports are overwhelmed with people going somewhere to their liking. This huge demand by definition would slow down the supply lines, but is not a permanent problem. Logistic experts tell us that the price of ocean freight has gone up 10 times pre-pandemic prices. Once again, a positive outcome for excess demand exceeding supply. There will be a day in the next year or so where supply chains will catch up and prices will fall. The reason I do not fear major long-term inflation is I see already prices moderating in real estate and in automobiles. Once the supply chain catches up with demand, prices will moderate, and inflation will not be a major concern.

Ava & Randy Wittman relaxing at the Rollins Beach House
Recently one of my clients sent me a video regarding the governmental debate over the new stimulus bills. It was a simple video that got me thinking about exactly what is going on in Washington these days. Basically, the video said that if you counted from one to a million and each second was another number it would take you 12 days to get to one million. While I did not try that myself, it certainly seemed reasonable. The video went on to say that if you did the same counting to one billion it would take you a cool 31 years to get to that number. It gave the impression that most people believe that one trillion is 100 billion. In fact, one trillion is 1,000 billion, not 100 billion. To count from zero to one trillion it would take you 31,688 years. There are not many readers of this posting that will live so long.

Put this perspective to what we are witnessing in Washington at the current time. There is no question that the country needs the roads, bridges and airports fixed and that would be money well spent by the U.S. government. The other bill debated in Congress is less clear that it is even wanted or needed. But make no misunderstanding exactly what is going on here. In my opinion, it is not a matter of satisfying the needs of the American people; it is more likely an attempt by the progressive party to do long-term damage the American economy to meet their political goals of weakening America against the rest of the world.

Believe me, I am not a conspiracist, but I do know numbers and I do understand them. Take for example Senator Bernie Sanders, age 80, who has indicated that rather than $3 trillion, this social spending bill should be $6 trillion. Just for comedic effect, the number of years it would take to count to 6 trillion is 190,000 years. But the reason that Bernie Sanders wants to spend $6 trillion has nothing to do with the programs in the bill. It has more to do with weakening the American economy for generations to come. He will not be alive that long, but it will be his legacy. To spend $6 trillion, basically the U.S. government would have to print new currency for the full amount. The long-term effect will be devastating.

DeNay flashing Braves signs at the game
If you understand economics, you understand that printing more currency creates inflation, creates debt, and creates long-term negative economic effects. While certainly spending that much money over a short period of time would make the economy better over the short-term, the long-term effects would be devastating to the future U.S. citizens. There is no justification for that type of spending where it clearly would all be deficit spending. I have looked at the provisions that they represent would raise the money necessary to fund a bill such as this, and it is an illusion that has no economic backing. Hopefully more informed politicians would put a stop to this silly provision and allow the U.S. economy to grow on its own without governmental backing.

One-time President Obama said, “Elections have consequences,” and the new presidential election certainly had consequences. I will not focus on the politics; I will just focus on the economics. If on the first day of office you shut down a major pipeline to deliver oil to the United States and you cut off all new permits in Alaska and in the Gulf of Mexico, you have reduced the supply of oil. What is the economic effect when you reduce supply in an economy where the demand is going higher? The basic answer is that you have shortages.

The price of oil during the writing of this posting has gone up 70% in 2021. Could anyone be surprised that it went up when you restrict supply? It would have been very easy to phase in each of those changes over a two- or three-year period, but rather the decision was made to do it immediately rather than with common sense. While certainly the people that desire more protection for the environment were elated, they clearly did not think of the unintended consequences of shortages and the price of oil.

Since oil is a major component of virtually all pricing, you can fully expect to see almost everything go up in price based on the price of oil. Whatever you call this, it is a tax on the American citizens. This tax more heavily weighs against the poor people and the people that must commute to maintain a job. If you increase the cost of commuting to these U.S. citizens, you have lowered their standard of living just like an additional tax would do.

Ava, The Little Sure Shot of Buckhead
All around the world we are seeing governments make stupid decisions based on environmental concerns. All of us should have environmental concerns, but we should do so with informed data and not by making rash decisions such as we have made in the United States regarding fossil fuels. The examples are overwhelming, and their consequences are downright scary.

Europe is a prime example of many environmental concerns gone awry. While France produces almost all their electricity with nuclear power, Germany has banned nuclear power in that country. Given that they do not have nuclear power plants in Germany, they are running dangerously short on energy and most of their heating is generated with natural gas. The main source of natural gas for Germany is the pipeline coming out of Russia and is controlled by the Russian government. Now if that does not scare you, nothing will. In a time of war what would Germany do?

Although a serious topic, you had to be somewhat amused that recently the President asked the Middle East to produce more oil for the United States to keep the prices down. Basically, the amusing part of this analogy is that we cut off your own supply and production in the United States and the price of oil went up. So now, once again, we are asking countries that are not particularly friendly to the United States to help us out of the energy crisis. Since it takes about 20 years to build a nuclear power plant in the U.S., we are backing ourselves into a corner since we can no longer use coal. Think about it for a second. If we restrict the production of oil and natural gas in the United States and coal is restricted, how are we to produce energy for the future? While solar energy and wind generated energy are nice, at the current time they do not even contribute a rounding error to the needs of energy in the U.S.

It is interesting to see all the car manufacturers reporting that they will be converting to electric cars in the future. Elon Musk made a great point the other day that we should consider. He indicated that if the majority of cars in the United States were converted to electric, we would need five times as much electricity than is being produced in the U.S. at the current time. Just exactly how can we get to those numbers with a restriction on fossil fuels and coal? The only alternative would be nuclear and currently there are no new nuclear plants being planned in the United States. While understanding environmental concerns, this is an area where common sense needs to prevail.

There was much handwringing in the financial media when the GDP was announced for the 3rd quarter at 2%. This was a major move down from the 2nd quarter of 2021 when the GDP was announced at 6.7%. While some of the financial press was sending out an alarm over this sharp reduction, it is quite obvious that they do not understand enough about economics to even form an opinion. While it is true that the GDP fell dramatically, the 2% number is a more realistic reflection of where GDP should be rather than the 6.7% in the 2nd quarter. In the first half of 2021 we had the government passing out money to virtually anyone who asked for it whether they needed it or not. As we now know, much of that money was fraud and siphoned off from the United States by foreign criminals. Whatever the reason, much of this money went into the economy and created excess GDP.

It is always scary when GDP gets that high, since you know the major concern of the Federal Reserve is to control inflation. As inflation goes up, surely higher interest rates will follow. Fortunately, since the GDP took a major step down, it gave the Federal Reserve an opportunity to sit back and wait on higher interest rates. It now looks like there will be no interest rate increases until the end of 2022. Stable interest rates are the most powerful force that leads stock markets higher. It looks like, at the current time, interest rates should be stable and low for another year.

If you believe the 3rd quarter GDP at 2% was correct and that the economy has slowed to an exceptional level, you would be incorrect. We are seeing the economy strengthening all around us before our eyes. Currently the Federal Reserve Bank of Atlanta is forecasting GDP growth in the 4th quarter to be up 8.5%. While the forecast of the Atlanta Federal Reserve has been fairly close in prior quarters if they are correct on this estimate, that would be a huge increase going from 2% in one quarter up to 8.5% in the very next. As mentioned above, one of the reasons why you are seeing such shortages throughout the economy is due to excess demand due to people holding on to excess cash. The reason why you see the stock market going higher is because much of this cash is being deployed in investable assets making all time new highs by the indexes. It only makes sense that people accumulated money over the last 18 months are now free to move around and spend it, creating higher GDP. That is exactly what is driving the markets higher.

I have often written that the major component to higher stock prices is higher earnings. When you see higher earnings then you can justify premium prices for stocks. Of the first 100 companies reporting in the Standard and Poor’s Index 0f 500 stocks this quarter, 84% of them had beat earnings expectations. You are seeing earnings growth throughout the economy in virtually every sector. Bank earnings this quarter were nothing short of spectacular. All of the bad loans that the banks anticipated happening during the pandemic never came to fruition. In fact, loan losses by banks are at one of the lowest levels ever. What we are seeing is corporate earnings exploding to the upside due to U.S. demand, which has been funded by governmental money. Whatever the reason, earnings have been so spectacular it has led to higher and higher stock prices.

Joe & Ava enjoying daddy-daughter time with the Braves
Almost daily I am confronted by someone pointing out the inconsistency of higher stock prices as compared to historic averages. They will explain to me that stocks are selling at 27 times forward earnings when historically have been more in the 16 times forward earnings range. Their statistics are not incorrect, but looking in the rearview mirror gives you no perspective of the economy we are in today. One of my go-to comments in these circumstances is show me a time when corporate earnings could be compared to a time when interest rates were virtually zero. It has never happened.

If you go back and look at the average of interest rates when 16 times earnings were reasonable, you will find the Federal Funds Rate at 4% to 5%. Interest rates have never been so low for so long. Yes, you can argue that stock prices are disproportionally high, but that is not the case if you base it on interest rates. Since we know that bonds will likely produce negative returns and cash is paying virtually nothing, the only game in town is stocks. And we are also seeing a huge demand to purchase stocks by the general public given the excess cash they have accumulated during the pandemic.

The Infrastructure Bill will now pass and that is another $1 trillion in government money that will flow to the private sector. Interest rates we know will stay stable or lower for the next year. We also know that corporate America is running at full capacity in every aspect. Hotels are full, airlines are full, manufacturing is robust, and construction is out of control. Everywhere you look around you there are shortages, but not because of an inability to produce but rather due to excess demand over supply. All of that even tells a shade tree economist earnings will be spectacular in 2022. I full expect to see new highs on all of the indexes for at least the next 12 months. As we get closer to the end of the year, I will give you my forecast on 2022, but already the performance of the indexes on 2021 have exceeded the expectations.

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond. We never left the office during COVID and have been here since day one of the pandemic. If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us. In the meantime, stay healthy and stay invested.

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

Best Regards,
Joe Rollins

Thursday, October 7, 2021

Get Ready For the Best Time of the Year to Buy Stocks!

There is no way to sugarcoat the fact that the month of September was a real stinker for the stock market.  Even though there was no fundamental reason why the market went down, I guess the weight of seven straight “up” months finally meant the traders needed to reestablish their dominance.  But it has still been a great year for investing so far and I certainly anticipate that it will be for the rest of 2021.  

There were so many “reasons” why the market went down in September that I need to address a few of the main culprits. We had the infamous Evergrande collapse in China which, for some reason, put some level of fear in U.S. investors in the market.  And as occurs every couple of years and means nothing, we had the debt crisis of extending the Federal borrowing limit.  We also endured the typical textbook move of traders selling tech due to a small increase in interest rates.  This argument is so full of holes, it is laughable that they even continue to quote it.

I have a lot of other things I want to talk about in this posting; the effect that potential Estate tax changes will have on you as investor, the current crisis in energy and how it was self-created, the incredible job the government did in 2020 to bring the country out of recession in comparison to the 2008 recession, and many other topics I hope you will find of interest. 

C-A-R-O-L-I-N-E Schultz, Age 7,
 ready for the big game

Before I get into those truly interesting subjects, I must discuss the very negative month of September.   The Standard & Poor’s Index of 500 stocks ended down 4.7% for the month of September but is still up a very satisfying 15.9% for the year 2021 and up 30% for the one-year period ended September 30th.  The Dow Jones Industrial Average was also down 4.2% during September but is up 12.1% for the year 2021 and is up a very satisfying 24.1% for the one-year then ended.  The NASDAQ Composite was down 5.3% for the month of September but is up 12.7% for the year 2021 and is up 30.3% for the one-year period then ended.  So even with the huge loss that we lived through during the month of September, the year-to-date numbers are all double digits and continue to be outstanding.  I fully expect that we will add positively to these numbers as the year progresses.  

The Bloomberg Barclays Aggregate Bond Index was also down 0.8% for the month of September.  If you thought being in bonds during a market sell-off was a good idea, you would have found it was not.  The bond index is down 1.7% for the year 2021 and for the one-year period it is down 0.9%, as compared to the double digits increase in the equity indexes.  It was somewhat surprising for the month of September that bonds actually got crushed as much as they did.  Not only were taxable bonds down, but the muni-bond market took a big hit during the month.  While it is true interest rates increased marginally during the month, this overreaction seems to be based on fear rather than economics. 

I guess the biggest event during the month was the potential failure of the Evergrande company, which is a huge real estate developer in China and was at the point of total default during the month.  There was a lot of handwringing here in the United States thinking that the failure of Evergrande would be the equivalent to the bankruptcy of Lehman Brothers in 2008.  Apparently, the analysts that drew that comparison did not live through the 2008 debacle, as I did, as certainly this was nothing compared to 2008.  

If you read the history of Evergrande, you will see how it got into trouble.  The Chinese government believes that to keep their citizens happy, they must keep them working.  It had been reported that China built entire cities with no one to move in just so the workers could stay busy.  While Evergrande is a semi-public company, it is heavily influenced by the Chinese government.  You have to wonder if all of these empty projects built by Evergrande were their own doing or at the insistence of the Communist government.  

As the day of the default came around, there was huge selling on the U.S. market for reasons not clear to me.  I can only assume that the traders thought that they could build up enough volatility and fear in investors that they would force them out of their positions so that they could buy into them cheap.  What was not reported was that the day after, Evergrande sold an interest in its banking subsidiary to the Chinese Communist government.  Surprise, surprise, the Chinese government injected $1.5 billion into the company to keep it from defaulting.  The most likely outcome of the Evergrande debacle, will be that the government will end up buying the company (or forcing another company to buy it), as it does with so many other companies on the verge of failure in China.  In my opinion, there is no way the Chinese government is going to put this many workers building real estate out of work.  

It appears that the Chinese Communist government is really scrambling now to reduce the positive aspects of capitalism on their economy.  They are proposing, in my opinion, restrictions that could not possibly be enforced.  One of the new ones that is fairly interesting is that Chinese children are not allowed to play video games during the week and then only three hours on Saturday and Sunday.  Good luck trying to enforce that one.  Interestingly, some of the most successful companies in China are video game providers.  

La Vie en Rose! Ava and Dakota 
on a beautiful day in Paris

Another one that came out during the month was that China will outlaw all crypto currencies, making it illegal to both buy them and even hold them.  This has more to do with the ability of crypto to be untraced and money moving out of China to a more stable economy like the United States.  There is no question that the Chinese government is scrambling to try to reduce the strength of the capitalist in China, which is pretty easy to do as the government can basically just step in and take over your company.  As you know, virtually all companies in China are owned partly by the Chinese government and, therefore, they will do as told.  

Another interesting aspect of China right now is that they are suffering a huge power shortage.  A great deal of the manufacturing in China has been restricted since there is not enough power to run the factories.  In Europe there is a huge shortage of natural gas.  The price of natural gas over the last several months has gone up four-fold and natural gas providers in Europe are failing daily.  Going into the cold winter months, all of Europe is concerned about having enough natural gas to heat their homes.  Most of the natural gas in Europe comes from a pipeline from Russia and they’re also a huge importer of natural gas from, of all places, the United States.  Even in the United States, the price of gas has gone up from $2 per thousand cubic feet to well-over $6 per thousand cubic feet, just in the last couple of months – the highest rate in over a decade.  Do you have any idea why the world is suffering an energy crisis? 

Economics 101 is pretty simple.  If you reduce the supply, then prices will increase.  Given equal demand, but less supply, unquestionably the price will go up in any economy.  The very first act of the new President was to put a stop to the Keystone Pipeline out of Canada, not over time, but that day.  Keystone is now suing the U.S. government for an excess of $10 billion for stopping this pipeline.  Also, the current Administration stopped all drilling in Alaska and would not issue any additional permits for drilling in the Gulf of Mexico.  Coupled with the hurricane season which took offline a lot of drilling capacity in the Gulf of Mexico, we have a supply constraint.  

Did anyone really believe that if you change the supply overnight, you wouldn’t have an increase in price?  Not only have we seen a dramatic increase in the price of gas and oil in the United States, but it is also clear that the entire world is suffering from a shortage of natural resources from the United States.  Do you realize that China is the largest importer of coal out of the United States?  China has such terrible problems with air quality because their principal source of energy is coal.  If you restrict coal and natural gas and you also prevent additional drilling for oil, you are going to have shortages around the world and the prices are going to go up.  We worked for five decades to divorce the U.S. from Middle Eastern oil.  Overnight we are now totally dependent on them again.  

Reid Schultz celebrating his
 6th birthday with friends Rex & Rattles

During the month, there was a lot of handwringing over the extension of the Federal government’s debt limit so that the government would not face a shutdown.  I am absolutely bewildered by the fact that people are concerned about this subject.  It happens every couple of years and is a major negotiating point for whichever party is not currently in the majority.  But the whole argument is almost silly considering the alternative.  Does anyone really think that there is a chance, even remotely, that they will not extend the debt?  If they didn’t extend the debt, what would be the repercussions?  Will they quit spending money – no way!

The U.S. government would shut down and our Defense Department would disband.  And more importantly, all the “pork barrel” programs that Congress has created would come to an end.  So, like so many times in the past, the financial press creates this frenzy regarding extending the debt, but they always do.  It almost amuses me to watch these speeches in Congress where basically the many members of Congress pronounce that the world will come to an end without the extension of the debt and how they hate each other for bringing up this subject.  Then at the very last second, they extend the debt at 11:00 pm on the night it expires, and they all sit around the campfire singing “Kumbaya,” while patting themselves on the back for cooperating and putting the country in deeper debt.  The new current extension of the debt is only for three months so we will suffer through this again in December, but you may rest assured, it is not an economic problem since they always extend it.  There is no reason for the market to go down.  

It is also hard to believe that our elected officials know so little about economics.  If you took the time to watch the questioning of Federal Reserve Chairman Jerome Powell and Secretary of Treasury Janet Yellen by Congress last week, you could see the economic wasteland that is in Congress.  Honestly, some of the questions were so ill-informed, I was embarrassed for them.  If you recall, former Federal Reserve Chairman Alan Greenspan used to make up flowery language to answer Congress without an answer.  I felt the same way this time with Powell and Yellen.  Some of the questions were so na├»ve as to not even merit a response, but trying to respect Congress, they gave articulate answers to inarticulate questions.  

Josh, many moons ago, finding fame 
on the Jumbotron at Turner Field

For reasons I am not totally clear on, the financial press continues to assert that October is the worst month of the year for the stock market.  The evidence absolutely does not support that assumption.  September, which has now passed, is by any definition the worst month of the year.  The only thing that can be said about October that has been proven by history is that it is by far the most volatile month of the year.  Yes, there have been many selloffs in October, but there have also been huge rallies.  Looking at this October, I expect volatility will continue.  However, I think we have a positive trend as earnings are starting to be reported in mid-October.  

It is hard to believe, but the projection now for increasing earnings for the third quarter of 2021 over the third quarter of 2020 is a projected increase of 27.6%.  It is true that it is comparing current earnings with a prior COVID quarter but if you look back into 2020 you will notice by the third quarter of 2020 the economy had already recovered.  Interest rates, while somewhat higher during September, were by historic standards extraordinarily low and the economy continues to expand at a more comfortable level.  

There is no question that the economy has slowed down from the second quarter.  At that time, we were running a GDP greater than 6%.  It is now believed that the GDP for the third quarter may be half that or 3%.  But it is extraordinarily important that we understand that we cannot run the economy too hot without creating higher interest rates, inflation, and other negative aspects.  A 3% economy is much better than a 6% economy where we would have capacity overloads and shortages in almost every industry.  Therefore, the trifecta of components leading to higher stocks are now in place and after the sell-off in September, we should see higher prices for the rest of the year.  Assuming no major economic event, of course.  

Ava chopping it up on the Jumbotron
 at Truist Park – Go Braves!

 I often wonder why investors do not see what I see when it comes to major market selloffs.  If a major selloff occurs during a negative economy, everybody understands that you need to protect your portfolio against further declines.  But when you have a major selloff for no particular reason, investors really should not do anything.  As you saw in the last week of trading of September every day was down huge, but then up huge when October rolled around.  It is so absolutely clear that the traders were forcing the market down and after the end of the month they covered the shorts so that their month-end balance sheets would not be distorted.  

I looked at the listing of over 125 mutual funds run by Fidelity Investments.  During the month of September, less than 10 were actually higher. This includes not only U.S. stocks but also international securities, bonds, and other types of investment products.  When you see that virtually every mutual fund was down, you must realize that this was not a natural move by investors.  So, when you get these types of selloffs that occur, which are principally concentrated by the hedge funds and the traders, your best investment advice is to do nothing.  As is often the case during selloffs, your best strategy is typically to look the other direction.  

It still surprises me that the U.S. government has not received better marks for its response to the 2020 pandemic.  I follow the trend of COVID very closely.  The vast majority of the states are trending down in number of new cases.  Although the death rate has remained stubbornly high, most of these deaths are people with preexisting conditions and the unvaccinated.  Even Dr. Scott Gottlieb, former head of the FDA, has projected that by Thanksgiving of this year the country will be back to normal due to the combination of the vaccinated (including children) and the people that have some immunity from previously having the virus which will significantly reduce the spread.  The economy continues at full speed ahead notwithstanding the virus.  

Marti and Mitch Musciano-Howard,  Age 17, 
 looking “TWO-rrific” for 
Homecoming 2021

The 2008 recession should be a close approximation to 2020.  If you recall in 2008, we had a major credit problem where companies were going out of business daily.  Even though the government came along and bailed out the banks and stabilized the economy they did nothing for the out-of-work employees.  In fact, it took three years for the economy to come back from its pre-2008 downfall.  

However, in 2020, due to the governments intensive funding of individuals and businesses, the recovery was almost overnight.  What we found was that the recession in retrospect only lasted roughly 90 days and already today the GDP is at pre-pandemic levels, although why employment is not where it needs to be seems to be a mystery to all economists.  Currently as of today there are 10.5 million job openings posted in the United States and there are only 8.5 million unemployed.  You have to think that shortly the unemployed will run out of resources and have to actually go back to work.

What is also interesting is that during 2020, which was a so-called recession year, the number of people living in poverty in the United States fell from 10.5% in 2019 to 9.1% during 2020.  How ironic is it that the actual number of people in poverty would fall during a recession year?  All these positive aspects are attributable to the Federal Government jumping in and bailing out the economy.

There is no question that the negative is that the amount of debt, as compared to the GDP, has soared.  Prior to the pandemic the Federal debt was 79% of the GDP.  It is now 98% of the GDP and the current Congress is spending at a rate that is unprecedented.  I am not exactly sure which economy Congress sees, but it is certainly does not need the $3.5 trillion injection of funds which would benefit some but make the amount of Federal Debt soar.  If you believe that the bill would be fully funded by additional taxes, then you don’t understand how the government works.  

One of the new provisions of the bill going through Congress is that it will reduce the amount of estate tax from a threshold of roughly $11.7 million per person to roughly $5.7 million per person.  If this bill were to pass in its current form, a lot more people would be covered under the estate tax than are currently.  In the United States there were only 1,900 Estate tax returns for the entire year of 2020 that were filed and owed estate tax.  As you can see, estate tax was almost nonexistent for most Americans.  However, if you reduce the exemption amount to the $5.7 million threshold a great many Americans will be affected.

Mia and family catching
 a Braves night game 

One of the financial concepts that I have always advocated for is that you gift to your children and others during your lifetime rather than at your death.  Did you realize that you could give $75,000 per child into a 529 account without gift tax and without it being included in your estate?  However, almost no one elects to do so.  

If you elect to make a transfer today, all the appreciation of those assets go to the second generation and avoid estate tax.  Yet so many people and certainly so many investors that I know refuse to make lifetime gifts.  I was meeting with a lady the other day on this subject.  She was in her 80’s and concerned about long-term care and her future.  Even though she had $8.6 million she was unwilling to gift any of it to her children who were struggling economically.  I finally asked her what exactly her concern was in making these transfers.  Her voice shrilled when she stated in uncertain terms that it was her money, and she may need it one day.  Given the fact that this lady was very frugal and long-term care while expensive is not exorbitant, the possibility of her needing all this money during the rest of her lifetime was strictly remote.  However, even with all my persuasive conversation with her she remained unwilling.   

I would like to briefly explain why traders believe that when interest rates go up you sell tech.  The origin of that axiom goes back to when tech companies had to borrow substantial sums of money to finance their operations.  However, large tech companies now hold more cash than probably any other industry by far.  If you look at the balance sheets of Apple, Google, and Microsoft you will note that they have cash balances well in excess of a hundred billion.  The thought that any of them would be required to borrow money is almost laughable.  It is true that all of them have some debt on their balance sheet, but mainly because the debt is U.S. based and the assets are foreign.  

Marti and Mitch reassuring Mia 
with their best, 
"We promise we’ll behave” looks

Anyway, I hope the traders did not scare you out of your positions these last couple of weeks when they were busy selling tech under the false pretense that tech goes down when interest rates go up. The most profitable companies in the world are tech and everything in our lives is controlled by them.  You can go around the world and see Microsoft Windows in every country.  Any increase in interest rates will have no impact on the financial results of these huge companies.  What is even more interesting, as the end of September came by interest rates actually fell.  So basically, a small increase in interest rates during the month of September may have led to the uncomfortable selloff this past month.  

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

As we get to the end of this year we would love to sit down and go over your portfolio and your investment criteria for the 2022 year and beyond.  We never left the office during COVID and have been here since day one of the pandemic.  If you would like to schedule an appointment to come in and go over your financial goals, we welcome you to visit with us.  In the meantime, stay healthy and stay invested.

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

Best Regards,
Joe Rollins 

Thursday, September 9, 2021

Sell in May and Go Away… Better Slow Your Roll

The title above is one of the most famous sayings on Wall Street.  For the decades that I have been in this business, all I have heard from professional traders is that you sell in May, go to your summer estate, and come back in the fall.  The theory was that in the old days trading stocks from the Hamptons without automation was very difficult and so rather than risk the negative effects of the market, you just sell everything in May and buy back in when you return from holiday.  In this posting, I will show you how big of a mistake that was this year.

I also want to cover some items that I find interesting.  At the current time the economy in the U.S. is slowing and that is a very good thing. Many would be surprised by this, so I will attempt to explain.  Also, I want to revisit the September 11, 2001, terrorist attack which was a scary time for all of us in the U.S., and a particularly scary time for stock market investing.  I want to cover that event to illustrate an important point, which is to be fully invested at all times.  I also want to emphasize the most important thing we as advisors can do on behalf of our clients.  And finally, I want to go over why China is having such a difficult time with the newfound wealth that their entrepreneurs are realizing.  The Chinese government hates income inequality, but maybe this time there are just too many millionaires to overcome their fear.  

CiCi dreaming about money

Before I cover these topics, I wanted to give you the score card for the month of August.  Remember, August, by many, is considered to be one of the worst months for investing.  While the evidence indicates that September has historically been the worst performing month and August second, this past month was quite excellent.  The Standard & Poor’s Index of 500 stocks was up 3% during the month of August and its one-year return is up 31.2%.   The NASDAQ Composite was up 4.1% during the month of August and is up 30.5% for the one-year period then-ended.  The Dow Jones Industrial Average was a lagger this month, up only 1.5% and its one-year performance at 26.8%.  

As a comparison, the Bloomberg Barclays Aggregate Bond Index, was down 0.2% for the month of August and for the one-year period it is also down 0.2%.  As you can see, all the major market indexes were up substantially during the one-year period and the bond index was negative.  You do not have to be a “rocket scientist” to figure out that a 10-year treasury today is paying 1.36% and the rate of inflation may be as high as 4% over the next year.  Even if the rate of inflation is half the projected rate, holding bonds will still give you a negative real return over the next one year.  Given that cash earns you exactly zero and the likelihood that bonds will have a negative rate of return over the next one year, investing in stocks may be the only game in town.  

Every day I hear from new investors who have no interest in investing in the market at all-time highs.  When they express this, I ask them exactly what all-time high they are referring to in the year 2021.  Just for the record, through August 31, 2021, we have had 53 all-time highs on the S&P 500 for the year 2021.  I know it is remarkable, but through 

Reid and Caroline ready 
to take on the world

August we have already generated enough all-time highs to rank 5th over the past century in the terms of record highs.  The record continues to stand at 77 in 1995, yet we are at 54 only through August.  There is a good chance that we will exceed the 1995 record closing.  So when you say that you are unwilling to invest because the markets are sitting at all-time highs, you may be disappointed as the markets continue upward. 

You may also be surprised to learn that the S&P 500 was up 3% during the month of August.  This is its 7th consecutive monthly advance during 2021.  Remember we are only eight months into the  investing year, which means only January was negative for this index.  In the history of American finance, this is only the 15th time this has occurred since 1950.  That is quite a remarkable run and coupled with the outstanding investment year we had in the year 2020, you can see the huge gains that investors sitting in cash have forever forfeited.  

Back to my comments on the title of this posting regarding sitting in cash during the slow summer months, 2021 refutes that argument in a huge way.  If you sold in May and did not return until September, you missed out on three full months.  Just look at the performance of the indexes during that fateful 3-month period.  The S&P 500 index for the last three months was up 8%.  The NASDAQ Composite was up 11.1% for the last three months and the Dow Jones Industrial Average was up 2.9%.  As you can see, the last 90 days were quite satisfying.  I know it seems like every day there is a new crisis to report in the national media, but as you can see, stock market performance continues to move higher notwithstanding the negative news everywhere you look.  I recognize that there are many things to worry about, but at the end of the day financial performance affects stock prices more than sensational news.  

As I have pointed out repeatedly, the most important component to stock prices rising are earnings.  Now we have almost the final tally of the S&P 500’s earnings for the 2nd quarter of 2021.  At the current time, we have 91% of the top 500 stocks in the U.S. reporting and a stunning 89% of those have shown year over year earnings growth.  That kind of earnings recovery hasn’t been seen since the end of the financial crisis in the 4th quarter of 2009.  

Reid excited for his first day 
of kindergarten

I do not want to sound simplistic when I say stocks may be the only game in town, but clearly that might be the case.  With market returns for the last year above 30%, I cannot imagine how investors in cash and bonds must feel.  Over the last one-year period, cash has earned virtually zero and bonds were either zero or negative.  So, in stocks you get a 30% gain and in those other assets you have losses.  It doesn’t seem like there are many other players in the investing world other than stocks.  

As I have emphasized to you, the big difference and change in Wall Street over the last few decades is the absolute tsunami of money that flows into the market daily from 401(k) plans.  No longer do the big cats control the flow of money as there is close to $1 billion a day flowing into the markets from small investors’ 401(k) plans.  This money comes in during good times and bad times and continues to stabilize the market at a higher level.  No longer can the hedge funds distort the market in a big way without suffering major risks of the small investor creating losses.  This change in the flow of money is good for all investors and provides very important stability to the U.S. retirement plans for older employees.  This could be nothing but a positive for those investing in the future.  

I referenced earlier one of the most important functions that we, as advisors, can provide to our clients.  In my opinion, that most important attribute is our ability to keep investors invested during difficult times.  I will explain that further in my analysis of the September 11, 2001, sell-off later in this posting.  But over the last couple of years, it has become self-evident.  In March 2020, we received an avalanche of phone calls from investors wanting to get out of the market. Of course, their fear in 2020 was the damage that the COVID pandemic would have on the economy.  As they called with their fear of the upcoming market, we tried to explain as best we could that they did not realize what the economy would do with an infusion of over $3 trillion from the Federal Reserve.  As we now know, the recession lasted only two months in 2020 (March and April) and at the end of the year the S&P 500 had a total return of 18.4%.  

I have several clients who call me on a regular basis panicking that they want to turn their investments into cash for various reasons, many of which are not economic.  I think my most important role is to try and calm their fears and keep them invested.  When you think about it, over the last 19 years, since 2003, the S&P 500 index has only been down two of those years.  If you calculate that, it’s roughly 10.5% odds of losing money in the S&P 500, but 89.5% odds of making money.  Therefore, you do not have to be a Philadelphia lawyer to understand you are always better invested than not invested.  An even more compelling number is that since 1970, the average rate of return for the S&P 500 has been 10.98% over that time.  Once again, history tells us that you are much better invested than trying to time the market.  If you could get rich timing the market, then you would be on the list of the wealthiest Americans.  As of today, there is not one single market-timer who makes that list.  

Caroline before her first day
 of 2nd grade

There is no question that over the summer months the economy has slowed down.  I am here to tell you that that is nothing but good.  The level we were functioning at in the first quarter of 2021, was just not sustainable.  The U.S. economy cannot grow at 6%+ without major disruptions.  We have seen that since the first of 2021, with the shortage of goods in the supply chain and the over-the-top need for employees to satisfy job positions.  There has been displacement in the automobile construction due to a lack of microchips and, of course, the shortage of construction supplies in the building industry.  The fact that the economy is now slowing will give pause to the Federal Reserve’s perceived need to cut bond purchasing and to increase interest rates.  Just as Federal Reserve chairman Jerome Powell indicated, the increases in prices most assuredly would resolve their own issue as the summer wore on.  The fact that the economy is slow now gives the Federal Reserve time to slowly transition into a more stable economy, earning a GDP more in the range of 4% rather than 6%.  

On Friday, the Federal Reserve of Atlanta reduced its estimate for the growth in the 3rd quarter to 3.7% GDP.  Only the previous day, that estimate was 5.3% growth.  Yes, these are huge moves to the downside, but are warranted by the supply chain issues and the shortage of products in the production cycle.  Also, quite frankly, it has a lot to do with summer vacations and a general slowdown in activity during those months. But I think this is getting ready to move to a higher level come the 4th quarter.  

Finally, this week the supplementary unemployment benefits will end and workers that were on long-term unemployment will be faced with either finding a job or doing without.  In addition, across the country schools are starting and childcare, which was such an enormous issue during COVID, will now decline.  At the current time there are roughly 11 million job openings posted and only 8 million unemployed.  At some point those numbers have to become closer.  

Last week the job report for August was a disappointing one at 235,000 new jobs.  But you must realize that this survey is taken in the middle of August and as we all know, August is a major vacation time up until the time school gets back in session.  But there were whirls of good news in this report that the media seemed to ignore.  For the month of August, unemployment dropped from 5.4% in July to 5.2% in August.  When I was studying economics back in the dark ages, the U.S. economy was considered fully employed at 5%.  We are very close to that level.  

In addition, during the financial boom before COVID, unemployment was around 4% and we are quickly reaching that higher level of employment.  There was also great news for wages in the report.  Wages went up 0.6% in a month and have increased 4.3% from a year ago.  When you consider the number of people employed in the U.S. a 4.3% increase in wages will do a lot to create additional commerce where these people have a discretionary income to support their families.  If you were expecting that I would write that the economy had slowed and that was a bad thing, you do not follow the Federal Reserve’s actions very closely.  In respect to Federal Reserve increasing interest rates, “bad news is always good news” and “good news is always bad news”.  This report very clearly will slow down the Federal Reserve’s action to slow the economy since it is slowing with its own momentum and, more likely than not, any interest rate increases will not be until 2023.  Even though the consensus growth of GDP for the year 2021 is at 6.6% growth, it would not surprise me to see that lowered to a more sustainable and more important growth of 4-5%.  

Fresh air isn’t so bad after all…

This year we will observe the 20th year of the terrorist attack in the United States on September 11, 2001.  I watched several features over the last week about September 11th on Netflix and Apple TV that were quite excellent.  If you do not remember the sense of terror we all felt on that day, I recommend you go back and watch these specials to reflect the anxiety and fear we all experienced.  

Many do not remember that the attacks were on a Tuesday around 9:00 am.  The stock market was just getting cranked up when the full impact of the terrorist attack was realized.  In fact, the New York Stock Exchange was within the shadow of the World Trade Center and many feared that the U.S. Stock Exchange would be damaged or destroyed when the two towers fell on that fateful day.  I vividly remember watching the second plane strike the second tower in my office at Colony Square.  Within the hour security guards came to our suite and told us to evacuate the building given the unknown nature of the attacks.  I thought to myself, if they are abandoning a B-rated office building in Atlanta over the attacks in New York City, we must really be in trouble.  I went home like most Americans and watched continuous television for hours before finally going to bed. 

It was a foregone conclusion the next day when the U.S. Stock Exchange could not open due to the damage in the building.  In fact, never in the history of the New York Stock Exchange had it been closed four continuous days, and it looked like this would be the first time this would happen.  We received an enormous avalanche of phone calls expressing outright fear and a desire to liquidate as quickly as possible.  I think we did our best work in convincing our clients that as horrible and as devastating as this attack was it was likely to be short lived.  This was a prime example of my philosophy of staying invested at all times.

On September 10, 2011, the Dow Jones Industrial Average closed at 9,605.51.  After finally opening six days later, the market bottomed on September 21st at 8,235.81 suffering a 15% decline in the 10 days after the attack.  I vividly recall the market swinging at hundreds of points a day during this sell-off.  A 100 point drop today is not as near important as 100 points were during 2001.  However, with the Federal Reserve’s help the market was stable even though it was highly volatile.

Do you realize how long it took for the market to fully recover after this sell off?  Exactly 90 days - after the September 11, 2001 attack, the Dow Jones Industrial Average closed up 9,888.37 for a 1% gain form the day preceding the attack.  If you sold into this sell-off, you clearly would have done a disservice to your investments. What was even better news on March 11th, exactly six months after the terrorist attacks, the market closed at 10,611.24 which was exactly a 10% gain from the day preceding the attacks.  Therefore, in the intervening six months after the worst terrorist attack ever on American soil, the Dow Jones Industrial Average had increased 10% over the levels preceding the attack. 

For Ava, the sky’s the limit!

Having been in this business for nearly five decades, I have seen many selloffs and many recoveries.  If you think about it just for a second, the day after the markets opened after the September 11th attack, the market closed the Dow Jones Industrial Average at 8,235.  Today that same index is 35,369 which means it has gained 368% in the intervening 20 years.  If you had stayed invested during that entire time, your portfolio would have increased almost four times the September 11th value.  

There has been a lot of publicity and questions by U.S. investors as to what is going on in China and their crackdown on some of their most high-profile companies.  Do not believe for a second that China is not a communist economy.  It is absolutely true that the government in China is controlled by the communist party, but their economy is clearly the second most powerful in the world.  What has developed over the last 40 years is an economy in China that is growing exponentially and correspondingly adding millions into the middle class.  Anytime you read statistics about the Chinese economy, you need to think that in the United States we have 330 million people, but China has 1.4 billion people.  Therefore, everything they do would need to be almost four times greater than the United States to be in a comparable basis.  But what has happened to the economy is very much hated by the communist government.  As you know one of the bedrock philosophies of communism is that everybody would be treated equally and there will be no winners or losers in that economic race.  Because of the newfound wealth of the Chinese companies, multibillionaires are being created on a regular basis.

The Chinese government now has decided that they have seen enough prosperity with their entrepreneurs, and they are anxious to get back involved in these businesses so they can ensure their wealth.  They recently shutdown an IPO of Jack Ma for no other good reason other than this IPO would have created too much wealth in one person’s hands.  Interestingly, Jack Ma has not been in the public eye since the Chinese government pulled the plug on this IPO for him.  

Chinese government has been coming out against cryptocurrency in every form or fashion.  They have shut down the miners of cryptocurrency and have closed down any exchange that allows for the trading of it.  The reason for this is very clear. One of the major advantages for those illegally moving money is cryptocurrency does not leave any audible trail.  Therefore, the Chinese government cannot control the movement of cryptocurrency exporting China into the United States, etc.  Rather than try to fight the trend it is easier to outlaw the trade, making it nearly impossible for those wanting to transfer funds out of China and into overseas markets.  

Elizabeth Flores’ three-legged pup
 smiling big for the camera

In recent weeks, the Chinese government has attacked some of the best-known industries in the world located in China.  They have basically shutdown the Uber of China and have placed enormous restrictions on any internet-based company located in China.  As you know, many of the U.S. based internet companies are forbidden by the Chinese government to operate there.  

It is pretty clear to me that the Chinese government is scrambling to regain control of their industries from the American securities markets.  Shortly after the Chinese version of Uber went public, the Chinese government moved in and essentially shut it down since they were forced to remove their app from further use by consumers.  Shortly after the IPO in the United States, the stock dropped close to over 40% and would you be surprised to know, after that drop the Chinese government agreed to invest in that company.  What is clear is that the Chinese government will do whatever necessary to ensure that individuals are not more powerful than the government.

As we enter September, which historically is the worst month of the year, you need to reflect on the fact that we have had seven straight positive months in the S&P 500.  This unprecedented run after the banner investment year of 2020 has left the S&P 500 almost 40% higher from when it began in January 2020.  While I do not expect that the market will move dramatically higher immediately, I do expect that the market will trade higher by the end of this year than it is today.  While it would not be a straight line up, I believe the market will grind on a slow basis with high volatility throughout the rest of the year.  As pointed out above, even with the extraordinary volatility, an investor is always better of being invested than not. 

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins 

Wednesday, August 11, 2021

Economically, This Is As Good As It Gets!

As the above title indicates, economically we could not be in a better place than we are today.  We are seeing a ramp up of the economy that is virtually unprecedented.  We have not enjoyed an increase in GDP as good as we have now since the Ronald Reagan years.  We are seeing the workforce go back to work and earnings of major corporations are quite spectacular.  Things are so good economically that I sit and wonder virtually every day why everyone is in such a bad mood and has such a bad attitude.  

Rather than criticize the media in this posting, I want to just give you hard facts.  I could talk about the ramp up of the economy and all the potential problems in the world, but I really believe that the best story of this economy is in the numbers themselves.  So, in this posting I would like to give you some hard facts about how employment is roaring back and will get better.  

Ava, Age 2,  first day of school in 2013 
and Ava, Age 10, first day of school in 2021
They grow up so fast!

I also want to talk about earnings and give you some specific examples of earnings that have never been higher. I will also discuss how the GDP was anticipated to grow over 9% but has been downgraded for a very unusual and unprecedented reason.  I also want to mention another recognition given to our Firm by the national media.  As you know our walls are covered from recognitions we receive from independent sources, and this month brings another.  Finally, I want to relay a personal story that a client asked me to include.  I normally do not venture into that area, but he thought it was interesting enough that I should share it with everyone.  

Before I get to all of that completely amazing and interesting information, I must cover the very excellent financial results from the month of July.  The Standard & Poor’s Index of 500 stocks was up a very satisfying 2.4% during the month of July. Year-to-date that index is at 18% and the one-year return is 36.4%.  The NASDAQ Composite also returned a positive return in the month of 1.2% and is up year-to-date 14.3%.  The one-year return on that index is 37.6%.  The Dow Jones Industrial Average was also up during July of 1.3%.  For the year it is up 13.3%- and one-year performance of 34.8%.  Just for a basis of comparison, the Bloomberg Barclays Aggregate Bond Index was up 1.1% during July and year-to-date is -0.7%.  The one-year return on the bond index is -0.9%.  Once again, I will point out to you that all of the major market indexes were up an excess of 30% for the one-year returns, while the one year return for the bond index was -0.7%.  

On Friday, the labor department announced that during the period ended in July, that there were 943,000 new jobs added during the month.  In addition, they revised the June numbers to reflect a total of 938,000 new jobs in the month of June.  Therefore, in back-to-back months U.S. employment has increased over 900,000 jobs in each month.  Even though the continuing message from Washington, D.C. is that American workers are hurting and all we can do is continue to subsidize them, that is clearly not supported by the facts.  Just look at the numbers as reported.  

Harper Wilcox , Age 11, first day of school

The unemployment percentage dropped to 5.4%, from last year’s 10.2%, for a total decline of 47%.  But even more important, the number of people unemployed one year ago was 16.3 million, and today only 8.7 million.  The numbers that I look at on an ongoing basis are what are called continuing claims.  These are the people that have exceeded their normal unemployment time but have been allowed to continue to claim for various reasons.  One year ago, 15.9 million Americans were in this classification; today only 2.9 million are, for a fall of 81%.  During virtually any other time, a 5.4% unemployment rate in the United States would be quite satisfactory and very desirable.  For reasons absolutely unclear to me, Washington still finds that number to be excessive, and even though I totally agree with putting everyone back to work that wants to work, I am against artificial governmental stimulus to accomplish that goal.  

I also believe that these unemployment numbers will get better in the very near future.  Finally, the supplementary unemployment benefits will expire on September 6th, and millions of Americans will lose their unemployment benefits, which have been a crutch financially for many.  In addition, schools are now gearing up and starting back and childcare will not be a major concern as it was this time last year.  The unemployment for July clearly emphasized that there are 26 states that no longer provide for these extended benefits and employment was strong in their states.  When the rest of the states fall in line with no extended unemployment benefits, I fully expect to see more jobs added.  As emphasized in so many of my postings, the more Americans that go to work, the more economic benefits to the economy.  These workers support their families and other businesses which create GDP for the economy, and higher income taxes to the government.  These are extraordinarily beneficial economic benefits for just one incremental job created.  

What is the most baffling of the job market today is that new job postings exceeded 10.1 million in June.  It is the highest posting for new jobs every recorded in American finance.  Compare that with the 8.7 million Americans unemployed and you would assume that these unemployed would take one of the job postings and move towards full employment.  Due to all the governmental assistance to these unemployed, they soon will be forced to deal with the economic reality.  Remember during this time, student loans did not have to be paid and you could not be evicted from your house or apartment for failure to pay rent or mortgage so substantial excess cash flow was not needed to sustain normal basic financial needs.  All those government-imposed economic sanctions are ending, thank goodness, and shortly those workers will be forced to return to work.  

Earnings for major American corporations are nothing short of spectacular.  In fact, they are so great that no superlative in the English language can truly exemplify how impressive they truly are.  Based on the corporations and the S&P 500 index, earnings for the second quarter of 2021 were exceeded by a cool 90% of the reporting companies.  That number is almost hard to believe.  And you would think that with the superior earnings in the second quarter, surely we are ready to peak and fall.  However, current projections are that earnings for third quarter of 2021 will be 29.6% higher than in 2020 and the fourth quarter are seeing gains of 21.2%.  To understand how quickly this swing in earnings has come upon us, just look at the analysts’ reports at the start of July.  At that time analysts were projecting that 65.4% of the S&P 500 stocks would exceed their prior year numbers.   

Lucy Wilcox, Age 9, first day of school

So rather than focus on some generic index, I thought I would give you a couple examples of earnings.  I elected to pick companies that we knew well during 2020.  The technology companies were never really impacted that much by COVID and their earnings during 2020 were excellent.  But if you thought 2020 was good, just look at the 2021 numbers.  For the quarter ending June 30th, 2021, Apple had $81 billion in sales and net income of approximately $22 billion.  During the same quarter a year ago, Apple sales were $60 billion and net income was $11 billion.  Please make sure you understand that we are talking billions and not millions.  Therefore, for the year over year analysis, Apple’s sales were up 36% and its net profit was up a cool 93%.  

Apple was not isolated.  Microsoft sales for the quarter ending June 30th, 2021 were $46 billion and in the prior year $38 billion, for an increase of 21%.  Net income for this year was $16 billion, last year $11 billion, for an increase of 47%.  Facebook sales for June 30th were $29 billion and in the prior year they were $18 billion, for a 56% increase.  Net income for Facebook for this year was $10 billion, and for last year it was $5 billion, a 100% increase in earnings.  

The numbers for Google were almost impossible to believe.  Google’s sales for June 30th, 2021, were $62 billion and their net income was approximately $19 billion.  Sales for the prior year were $38 billion and their net profit was $7.4 billion.  Therefore, their sales increased 62% for the one-year period, but unbelievably their net income was up 150%.  

Ava swimming her way 
through the ball pit

I have written over and over in these postings that there are three important components to stock prices - interest rates, earnings, and the economy.  Reflect on what you’ve read thus far.  The economy is absolutely as good as it gets.  Earnings are spectacular by anyone’s definition.  As for the last component, a ten-year treasury is now selling at 1.2%, nearly the lowest percentage ever recorded in American finance.  People ask why I continue to be constructive on the market moving higher and I give them the above numbers.  I am not influenced by financial media or the writings of the so-called “conspiracy editors.”  I rely on hard economic facts and those facts today indicate a higher market.  

I had a client that owned Amazon stock call me the other day and express concern about the negative financial news surrounding Amazon for the quarter ended June 30th.  I first cautioned the client to be careful of the information they get from the media.  In the first place, most of that information you get has substantial “conflicts of interest” behind it.  The people that appear on the financial news are not paid correspondents.  They do it for free to promote their own agenda.  Oftentimes the information presented is tainted with that “conflict of interest” and, therefore, misleading.  Any time you have a question regarding those types of reports, look at the facts and quit listening to the commentary.  

We all know that Amazon had a tremendous year in 2020.  They were the benefactor of the COVID stay-at-home world.  How could they possibly ever improve upon the performance of such a banner year as 2020?   Looking at the figures for the quarter ended June 30th, 2021, Amazon had sales during the quarter of $113 billion.  In the prior year’s quarter, they had excellent sales of $88.9 billion.  Therefore, they increased their sales from the gangbuster 2020 by a cool 28%.  However, more importantly, their net income for the year 2021 was $7.8 billion.  In the prior quarter in 2020, their net income was $5.2 billion.  Simple arithmetic tells you they increased their net income by 48% during the one-year period.  I am not sure exactly which planet those commentators live on, but if you can increase net profits by 48% in one year, that, by far, is a spectacular return.  

Dr. Ketan and Payal Patel and
 family enjoying a Braves game
The reason I elected to write this section in this posting was it may be very possible we will never see an earnings quarter as great as we saw this past quarter.  While I fully understand the projections are still higher for the rest of the year, if those projections even prove to be moderately correct and earnings continue to accelerate at these levels, frankly, the market today would be underpriced and not so overpriced as you hear every day from the media.  It is pretty simple. Review the facts and do not listen to the commentary when making a financial judgement.  

In prior postings I expressed the opinion that it is highly likely that the GDP in the United States will exceed 9% for the 2021 year.  I now have to back up from those numbers since there is more evidence regarding the economy.  The current projection on the GDP for the whole year of 2021 is up a sterling 6.8%; still the highest returns on the GDP since the 1980’s.  So, what has led to this drop in projected earnings when the economy continues to be running at a very high and excellent pace?

Strange things have happened coming out of the Covid lockdown.  Corporate America could never have projected that sales were going to ratchet up so quickly that we have created shortages throughout the U.S. economy.  It is very rare to see wholesalers and retailers project their potential sales so poorly.  Suddenly, we have created shortages in many basic building supplies and appliances.  This is not due to a lack of manufacturing; it is just that the demand has so far exceeded the supply that we just cannot catch up.  Just to give you an example, wholesale sales in the June 30th quarter were up almost 28% over the prior quarter last year.  Basically, those numbers come down to a prior year wholesale sales of $461 billion as compared to $588 billion this year.  Just think about that for a second.  That is $100 billion in additional sales and quite frankly we were not geared up to handle such volume.  

35-year clients, Janice and Gary Thompson
 and family in Jackson Hole, Wyoming

We are also having a huge shortage in microchips for many segments of the market.  During the quarter there were multiple times when the car companies could not manufacture since they did not have the appropriate chips.  You saw production lines shut down entirely since there was no sense manufacturing without the appropriate parts. You saw retailers run out of refrigerators, dishwashers, and other basic appliances for your house.  With so many Americans staying home rather than commuting to work, it was a good time to upgrade your home appliances and retailers could not have possibly kept up with that demand.  

Car sales are just unbelievable at the current time.  I recently bought a used car and the salesman told me a story.  He said that a friend of his bought a pickup truck exactly one year ago from the date that I was in the store.  The salesman indicated that the exact same customer drove the pickup truck for one year, brought it back and resold it to the same store for $3,000 more than what he had purchased it for one year ago.  There is this huge shortage of previously owned automobiles in America.  The demand for them is unprecedented and one of the major components of the increase in GDP and inflation has been the upward revision of the prices of used cars.  

New car sales continue to be spectacular.  You would think logically that if new cars are selling well, that those people would be trading in used cars and creating an oversupply of used cars.  If you think logically, you are missing the point.  The reason why used car sales are so great is that people have excess cash and the people buying the used cars are the ones that previously had no car.  So yes, you see trade down from people buying new cars to used cars, but the much bigger demographic today is people buying cars that never had owned one previously.

Did you realize that right now it is very difficult to rent a car from a major rental car company?  I quit trying to rent cars in Tampa, Florida since they just don’t have any to rent.  Virtually all the major rental cars went bankrupt last year during the pandemic.  During those bankruptcy proceedings they were required to liquidate their inventories and now they cannot get the cars back in the rental pools. Not only are rental cars extraordinarily scarce, the prices are absolutely ridiculous.  On our ten-day trip to Montana, the rental car we used cost in excess of $3,000 for the 10 days.  You could have made a substantial payment on a used car for a car we only had in our possession for 10 days.  

Birdie, Blooper and Ava
 catching a Braves game

Therefore, my forecast on the GDP while based on current information would never have contemplated the shortages we have in the economy today.  Given those shortages, GDP will be held up, but continues to be extraordinarily healthy at 6.8%.  Another interesting statistic is that the International Monetary Fund has upgraded the world economy significantly over the last 90 days.  Their projection now is that the world economy will grow at 5.6% during the 2021 year.  Put that in perspective.  An entire world economy was shut down due to the effects of Covid in 2020.  Even with those lingering problems, the projection is that the world economy will operate in 2021 at a level that ranks as one of the best of all time.  

As many of you that read my postings know, our Firm has received numerous recognitions in the national media over the last several years.  I want to make sure that everyone realizes that these are not paid surveys.  In fact, we do not even give them the information, they gain it from published regulatory reports.  We were very fortunate to receive high recognition from CNBC and The Financial Times in prior years.  I have spoken about those before.  Our walls are covered in our office with many of those recognitions we have received. 

This month we received another recognition for which we are proud.  We received the recognition that for the year 2020, we were the 41st fastest growing firm in the United States by Financial Advisor magazine.  Take into perspective that this is a national recognition for a firm located here in Atlanta.  We did not advertise, ask, or pay for this recognition, and to be so honored is quite rewarding.  What was the most important fact to come out of this recognition was that in the year 2020, our net assets under management grew by a stunning 41%.  We were up almost 50% in assets that we manage for clients over the last 18 months.  While these numbers are quite impressive, even I have to admit that none of this would have been possible without our clients and our staff.  We have absorbed the 41% in growth and assets and moving into the 2021 year, we have grown substantially since the first of the year.  We are very thankful and appreciative to all those clients and staff that have made that happen. 

Dakota and Ava at the famous Antler Arch
 in the center of Jackson Hole, Wyoming

I recently told a client a story about my adventures in France which he found amusing and thought I should relay it in one of my postings.  It all begins when Dakota and I elected to take a tour throughout France.  While I have been to Paris many, many times, I have never ventured into the interior part of France or over into the east side where the Alps are located.  The trip started with a few days in Paris and then a bus ride over to Normandy.  If you have never been to Normandy, France believe me it is well worth your trip.  Once you see the beaches where the D-Day battle occurred, you will understand why so many died getting to the cliffs.  The beaches are expansive, and those soldiers were easy targets for the machine guns sitting on top of the hills.  You will never get such a humbling feeling after looking at the beaches and walking though the U.S. cemetery where 11,000 Americans are buried.  Interestingly, the land in which that cemetery sits is not a part of France.  That cemetery is actually American soil on the beach of Normandy.

We traveled down the east cost of France on the Atlantic Ocean to see the castles and the spectacular cathedrals that were built generations ago.  The most interesting part to me was actually traveling though the interior of France.  We stopped at an American grill and you would have thought we were in Indiana.  The fields were covered with corn and other plants and the fields were worked by workers that could have easily been in the Midwest.  From there we went south to the world-famous French Riviera.  Yes, I know the French Riviera is quite a disappointment if you have ever been to the Redneck Riviera on the Gulf Coast of Florida.  

The beaches in Nice, France are famous and legendary throughout the world.  Did you realize that there is no sand on the beaches in Nice but only small pebbles?  I saw more than one person going to the water on these beaches fall as the rocks slid out from under their feet.  Believe me if you had a choice of beaches, the Gulf coast is far superior to the beaches in Nice.  Not that you can truly compare the two, if you move away from the beaches there is nothing in Panama City, Florida that looks anything like Nice, France.

A mother and baby black 
bear roaming Yellowstone

From there we moved north through the Alps and ended in Dijon, France.  Dijon is, of course, famous for the mustards that they ship around the world.  I didn’t realize that mustard was actually made with white wine which maybe explains why I like that form of mustard.  There were other interesting facts to come out of Dijon, France.  First there is no mustard made in Dijon, France; it is made in huge factories in other parts of France.  Also interestingly, the mustard seeds are not grown in France, but are actually grown in Canada.  In order to make mustard in France, they have to import out of Canada.  While the city was the origin of the famous mustard, none of it is actually manufactured in that city any longer.  

What Dijon, France is now known for is the best escargot.  They load this dish down with so much garlic you can walk down the street and smell the garlic in the streets.  However, as you would suspect in any tourist trap, two orders of escargot and a bottle of wine is extraordinarily expensive and not for your average lunch price.  But from that point the story gets more interesting.  

We had booked tickets on the bullet train that goes from Dijon back to Paris to complete the trip.  As it would be, our seats were in the last row in the railroad car.  These high-speed trains in Europe are quite nice.  They have leather seats and comfortable surroundings and music playing at all times.  Once we got comfortable in our seats, I took note that the music playing that day happened to be Motown music.  I grew up listening to Motown in the 70’s and 80’s and it continues to be my favorite form of music.  In many cases I saw the actual artist perform at some point and have always appreciated the unbelievable story of how Motown went from nothing to one of the major music recording companies in the world.  

As we were watching the countryside fly by in this train while listening to Motown, I thought to myself how strange it was that here we are in the heart of a foreign country, yet they are playing American music.  I guess I felt a form of pride that they would so honor America by honoring its music, which I enjoyed immensely.    

A long horn sheep in Yellowstone 
losing his winter coat

At long last we reached the outlying sections of Paris and ended up in the station at the exact appointed time.  As we packed our things and walked out to the platform of the train station, I noticed that the same Motown music in English was continuing to play.  At that point I decided I needed to investigate to find out why.  What I came to find out was that during the entire trip it was actually my iPhone that had been playing inside my pocket. While a bit embarrassed, I thought to myself how nice those people in the car were. For that two-hour trip they sat by and listened to my Motown music in English throughout the French countryside.

As the holiday season is sneaking up on us, we have had quite a spectacular financial year so far.  When I look at all the indexes above that have one year returns of an excess of 30%, I wonder what the people at home that have cash are thinking.  How bad could you feel if you have substantial cash balances in a money market account earning zero when the indexes are up over 30%?  I understand that so many people express the opinion that they are waiting for a correction before they invest.  Those same people said that two years ago and the market is up close to 60% over that two-year cycle.  If you have excess cash, you should invest it.

I had a client the other day who said to me, “I didn’t know that I could make an IRA contribution.”  Just to set the record straight, if you have earned income, everyone, without exception, can make an IRA contribution.  Why this matter is so complicated is because it is intertwined with the question of whether it is tax deductible.  Therefore, your options regarding the IRA are in this order: tax deductible IRA, Roth contribution of an IRA, or nondeductible IRA.  If you have excess cash, putting money on a tax deferred basis is very smart.  We often set up Roth accounts for minor children that have some earned income.  Think about the financial repercussions of such accounts.  If a teenager could put away tax free money for life at an early age, by the time they reach retirement, just imagine the amount of tax-free income available to them.  If you have not been making IRA contributions for fear that you are not allowed to, please call us to discuss. 

As always, the above comments are based on my personal research and opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

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

Best Regards,
Joe Rollins