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