Summary, Commentary and Moneytalk Excerpts, August 16, 2008
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Bob Brinker’s opening monologue paraphrased:
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Stock Market: Covered later.
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Ten-year Treasury Bond at 3.85% -- Ten-year Inflation-Protected Security base rate at 1.66% – a differential of 2.2%, which represents the implied inflation rate for the next decade.
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Thirty-year Treasury Bond has a 4.47% nominal yield – interest paid semi-annually. Base rate on TIPS 2.07% —a thirty-year implied inflation rate of 2.4%
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Headline inflation has been elevated – Core rate very low at 2 ½% on CPI and less on the PCE. The PCE Index is favored by the FOMC.
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Housing Market: Brinker cited a study by the Columbia Business School. Brinker gave several “statistics” about over-valuation and under-valuation of real estate in different cities and areas. He said the study indicated that San Francisco and San Diego California are under-valued by 1%; New York City 5% under-valued; Detroit, Michigan 12% under-valued. Miami and Phoenix both at 13% over-valuation; Chicago 11% over-valued; Tampa 9% over-valued; Minneapolis 7%; Los Angeles at 6%; Atlanta, Washington and Denver at 5%; Charlotte NC at 4%; Boston 3% over-valued. (Honeybee EC: Yesterday I asked for help finding the link to the study that Brinker cited. A helpful reader sent it to me this morning and I want to sincerely thank him.)
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Calculating Where Home Prices Will Land, New York Times
Percent Overvalued, New York Times
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Brinker said that there has been a small pick up in the number of RE sales – all price related -- not because of the economy, which is soft.
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Economy: Real Gross Domestic Product growth annualized from the start of this year is at 1.4%. Brinker said that his forecast for this year was between 1 - 2% for calendar year 2008.
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Mortgage Rates: In a relatively narrow range, but have inched up a bit -- 30-year fixed rate is now 6.64%. In January it was at 6%.
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Housing Recession: Is ongoing and will take time to work out. If construction stopped today (which it won't), we have a 3-5 years supply of housing on the market. Brinker said that IF we see the economy starts to get better in 2009, the housing market could start to improve.
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Caller: Asked if there is any possibility for the U.S. having a balanced budget? Brinker said there is no chance of a balanced budget happening because congress is “out of control”-- even after two years of a democrat majority. Both parties continue big spending and show no fiscal responsibility.
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Caller: Asked what Brinker thought of her giving her daughter $300,000 -- which was half of her net worth -- to help her daughter pay off her mortgage. Brinker said he certainly would not recommend that she do that – instead she might want to help her daughter make her payments.
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Caller: Asked about GNMA Fund NAV fluctuations. Brinker told him that GNMAs have a direct guarantee from the U.S. Treasury to repay principal and interest. This does not apply to Fannie Mae and Freddie Mac. Brinker recommends Vanguard GNMA Fund. The 52-week change has been between $10.07 - $10.55 and is now at $10.24 – in the middle of the NAV range.
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Caller: Asked about Brinker’s political involvements. Brinker answered: “I have made no contributions to any political candidates……..and number two, I have been and remain a registered independent voter.”
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Caller: Explained that his financial management company said they wanted to move his money to a different financial management company because they could make faster moves. Brinker suggested that the caller simply invest in broad-based funds, such as the Total Market Index in order to completely eliminate the risk of under-performance and to get high tax efficiency and low expenses. Then Brinker said to the caller: “I want to give you credit because I think you’re right to be cynical. When somebody comes to you like this and says we want to switch it over, first of all, let me give you my reaction to the reason you were given --they can react more rapidly to the financial markets than we can --well I have to be honest with you, when I hear excuse like that for making this kind of change, it sounds to me like it might be a very lame excuse. And I’m putting a smiling face on it, it might be worse than that. It might be complete bull-bleep. Can we talk mano-a-mano here? Bull-bleep! That’s what we might be talking about here. But best case, it’s very lame……”
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Brinker talked at length about the dramatic changes at auto-dealer's lots because of the near doubling of the supply of low-mileage cars, such as the GMC Yukon, Excel, Suburban, Ford Explorer. He also talked about the dramatic shrinkage of the supply of high-mileage vehicles such as the Ford Focus, Chevrolet Cobalt and the Toyota Prius. Many people are struggling with making a decision about buying lower-mileage vehicles, but suffer sticker shock when they see the low value that they will get on trade-ins. In many cases, the loss is so great that it's best just to continue to pay the high gasoline prices.
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STOCK MARKET......Bob Brinker said: “Standard and Poor’s 500 Index standing in at 1298.20 – tacked on a few points for the week -- had a decent week. It was no big deal one way or the other but on balance, it had a decent week. We certainly have seen a decline in oil prices since mid-July. Oil prices have come down from the $147 area to the $114 area during that period of time going back to the 15th of July. You may remember back then the S&P 500 closed at the 1215, now setting up at 1298. Remember we talked on Moneytalk about the inverse correlation between oil and the S&P 500. Well there you have it in black and white. Oil down from $147 and to $114 -- S&P during that period, up from 1215 to 1298.”
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(Honeybee EC: Brinker first began talking about the “direct correlation” -- which he is now calling an “inverse correlation” -- between the price of oil and the S&P 500 the last week of June – the worst June for the S&P in over 50 years. Brinker continued to use this new market-timing element during the month of July – the month when the S&P dropped firmly into bear market territory – a fact that Brinker has never mentioned either on Moneytalk or his Marketimer-newsletter.
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Some might wonder if it’s all just an excuse to justify the fact that his timing model, which is theoretically supposed to predict when a bear market is coming, did not anticipate the markets intermediate correction or the bear market correction. Indeed, Brinker failed to call the bottom of the correction correctly.
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You will recall that on Moneytalk, he claimed that the "March lows" were the bottom of the correction and said that his had issued a new "attractive for purchase" level in the low-1300s in February. April 19th Moneytalk, Brinker said: '"When we saw that weakness on the correction test into the low-1300’s and that very, very minor weakness that we had just below that level for a very short window of time, I was doing the same thing that John was doing – which was adding to positions."
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Now, Brinker has arbitrarily chosen a time-frame from the middle of July to make his case that he was “right” about the S&P and Oil correlation being the cause of the bear market. Pardon me and with all due respect to Mr. Brinker, doesn’t that seem a bit silly?
- For the month of July, the S&P declined 1%
- For the month of July, the price of Oil declined about 12%.
- August 1 – 15: Oil declined 9%
- August 1 - 15: S&P gained about 0.2%
Conclusion: Since the first of July when Brinker began this new "direct correlation" scenario, Oil has dropped 20% and the S&P has gained a whoppin’ 14 points. (S&P on July 1st was 1284, it's now 1298) Graph courtesy of Kirk Lindstrom:
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Brinker’s Saturday guest speaker was Charley Maxwell, the senior energy analyst at Weedon & Co. Brinker asked Maxwell about his previous oil price predictions in spite of the fact that Brinker is on record saying this on July 12, 2008: “Now I wish I could tell you what the price of oil is going to be in a week, a month, a year. I don’t know. I have no way of knowing and I think only a fool would try to forecast the price of a barrel of oil in the world we live in…….”
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“It’s on all of our minds, what happens next? In quick terms, I think that we are not solving the problem we have of less and less oil being produced in the world over the next five and ten years. And the fact of emerging countries like India and China and Russia and the Middle Eastern States surging ahead with their demand. Probably nothing will stop it because they also subsidize their demand making it extremely cheap for their people to avail themselves of the supplies so that demand is maintained higher than it should normally be.
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And for these reasons we think that taking a long-term view, of the price of oil will stop here for a year and a half or so – maybe two years and then continue up. But for the next one and a half to two years, I think we get a breather and a wonderful breather. I’m looking for the price to come down temporarily to around $80 to $90, and perhaps to stay quite a while around $100 and that’s a good retreat from $147."
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When Charley Maxwell appeared on Moneytalk last September, he predicted that oil should stay in a range of $50s up to $80 a barrel for another two years.
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Note of interest: For those who are unable to listen to Moneytalk when it is broadcast, KGO archives the program for FREE downloading for one week after the program airs. Simply go to KGO's website and click on "Archives" and listen, or download and listen at your convenience. http://www.kgoradio.com/
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