(I was asked to add a link to the comments here since the link is difficult to find at the end because of the length of the Summary.) Here ya go: Summary Comments
Moneytalk Summary, Commentary and Bob Brinker Excerpts, October 18-19, 2008. Dow: 8852.22; S&P 500 Index: 950.55; Nasdaq: 1711.29; Oil: 72.05
Bob Brinker opened Moneytalk Saturday by saying: “Another volatile week in the financial markets around the world….. Here in the United States, volatility is in at unprecedented levels recently and that continued this week.”
Brinker went on to say that on his program last week he talked about a couple of things that he thought could be done that had the potential to make a difference in the financial situation going forward. He said: “We can now say that one of them has been done, although unfortunately, the other has not been done.”
Brinker comments paraphrased: The one that has been done was the massive $250billion injection of government capital into the banking system – part of the $700billion Emergency Economic Stabilization Act of 2008 which was passed by congress a couple of weeks ago. This program followed “exactly” along the lines that he had talked about last week on Moneytalk.
In Brinker's opinion, it is a good program. It involves the purchase of “straight preferred shares in the banks” – not convertible to common shares, not convertible preferred and non-voting, so "Uncle Sam isn’t running the bank." The preferred shares are callable on par within 3 years. The program was called a voluntary, mandatory program. Voluntary in that the banks had to accept it, but mandatory in that they were given no choice – as described by the Treasury Department. There are executive compensation restrictions and there is an equity kicker in the form of warrants which amount to about 15% ownership in the participating banks (and for the nine large banks, their participation is mandatory). The rate is 5% for the first 5 years and then kicks up to 9%, but the banks can pay them off if they choose.
About $125billion goes to the nine largest banks, including Bank of America, J.P. Morgan, Wells Fargo and Citigroup, also Morgan Stanley, State Street, Goldman Sachs and Bank of New York Mellon. The other $125Billion will be spread in banks across the United States. There is a 90-day foreclosure restriction, designed to get credit flowing again and reduce systemic risk. And it’s part of a correlated effort that includes providing short-term commercial paper relief to corporations aimed at improving liquidity.
TROUBLED ASSET RELIEF PROGRAM Brinker said: “This is all fine and I think this is a really good use of the money and I think it’s way better than the troubled asset relief idea that as we have said is troubled from the get-go because of the conflict of interest that is inherent in the Troubled Asset Relief Program. Remember we talked about this………I’m not talking about the $250billion that was injected into the bank’s capital structure. I’m talking about the remaining $450billion that supposedly is to be used to purchase troubled assets. And the problem with that program is from the taxpayer point of view, you want to put out the minimum bid on the reverse auction so the taxpayer doesn’t over pay. But from the bank point of view, you want to get the highest possible price so as to reduce the impairment to the capital of the bank. This is an inherent conflict of interest, and it may be a gaping difference. We know that Merrill Lynch is sold some troubled assets in July at 22 cents on the dollar. We know that some of these banks are carrying these troubled assets at 50, 60, 70 cents or more on the dollar…………..I think this is a problem that will not go away……….it will always be an issue at every auction…….
.......Now the other part of the program which we talked about last weekend has not been implemented and that’s a shame because we do have the brain power in Washington to do this. We do have the resources to do this, so it’s very unfortunate that nothings been done…….Now we have given already a mortgage guarantee program idea here on Moneytalk that has not been acted upon……..Most people make their mortgage payments in a timely manner so guaranteeing mortgage payments would not cost Uncle Sam a dime on most mortgages…….. The renegotiation part of the program would simply involve providing better terms on a delinquent loan to turn it into a performing loan. Renegotiate the loan. Keep the people in the house……..And the third category would involve foreclosures, which is the resolution trust corporation solution. Where the government making the mortgage guarantee payments to the bank on a monthly basis, the government would take possession of the property, and eventually would resell it over a period of years as things normalize in real estate……….that is what was done with resolution trust and it worked………no reason to put people out in the street…..”
Brinker told caller Loren, that most people would rather stay in their home rather than move in with parents, live in cars or under a bridge. He said there were other good ideas floating out there such as allowing residential mortgages to be refinanced into a low-cost Fannie Mae or Freddie Mac loan -- the government owns 80% anyway. He said it would be a lot cheaper in the long run than throwing people out in the street. Brinker said another good idea would be to work out an option to purchase later – stay in the home and pay rent, then later on they could reclaim it.
Brinker said: "But I ask you a question, where is the creativity in Washington on this score? I just talked about three separate solutions that get to the core of the housing issue, which is people in troubled loans…….Where is the creativity in Washington on this? What are they doing?...........They really eventually have to address this issue. They cannot ignore it………”
When Loren expressed her concern about people who have struggled to make their mortgage payments and have played by the rules being treated unfairly by having to pay for these bailouts, Brinker said: “I’m sorry, but they have no horse in this race……. This is not about them. It’s time for them to stop feeling sorry for themselves that played by the rules and did everything right. They don’t need help – they’re fine. They made their payments. We are talking about a situation here where you have an alternate choice of throwing people out of their house, having an empty property with no revenue and weeds growing against trying to renegotiate a deal and get a more positive outcome ……..”
Saturday, only one caller mentioned the stock market. Caller Craig said: “You know when you had a cold last week, I noticed the whole stock market had pneumonia, so I really hope you are better."
Brinker chuckled then replied: “I don’t think the two go hand in hand. The stock market had a little better week this week which is good to see, but obviously the stock market has a lot of work to do over a long period of time given the damage done.”
INFLATION: Brinker said he expects very low inflation in 2009. He does not believe the bailout plan is inflationary.
WASHINGTON IGNORES BRINKER: Brinker complained at length that “Washington” has ignored his ideas and suggestions for resolving the mortgage/banking crisis. Brinker said that because Moneytalk is broadcast all over Washington D.C. on WMAL radio, it would be impossible for the powers in Washington to not have heard his suggestions, but so far, “nobody in the government has shown any interest in this.”
Honeybee EC: [chuckle] In light of the fact that Brinker has been completely wrong on everything he has prognosticated for more than a year now, one wonders why he thinks anyone should follow his advice now.
Brinker was wrong when he was calling for new stock market highs in January, 2008. And he has been wrong to advise investors to remain fully invested as the stock market declined over 35%. Brinker was wrong to say the stock market would respond “inversely” to the price of oil. Brinker was wrong to act like he had no way of seeing the banking mortgage crisis happening – he had talked about it for months. His excuse-doggies just don’t hunt. 8) And Brinker was especially wrong each time he called new market bottoms in 2008 and then rescinded them.
* Aug 16, 2007 - January 4, 2008 @ 1411: Mid-1400's
* January 20th -- rescinded mid-1400's (recommended dollar-cost-average only)
* Feb 10, 2008 @ 1331: Low-1300's
* Aug 5, 2008 @ 1285: 1240 or less
* Sept 2, 2008 @ 1282: Low-to-mid 1200's
* September 16th -- rescinded low-to-mid 1200's (recommends dollar cost-average only)
Sunday, Brinker’s opening monologue was devoted to his views about muni-bonds (there has been some improvement), different types of muni-bonds, California’s politicians who want to raise taxes, generous pensions for government workers -- politics in general. The second hour monologue was almost a verbatim repeat of what he said yesterday – see excerpts above.
Sunday, there were no questions about the stock market (again) but there were several callers who asked about the safety of California muni-bonds. Brinker recommended that investors keep those holding small enough that it would not be a “life-altering event” in case something goes wrong with them.
Honeybee EC: Brinker seems to think that Arnie is good for California. Brinker said he gets “ill” when he hears people "bash Arnie."
Well, Bob, some of us rare Californians of more conservative political persuasion do not agree. Arnie is better than the impeached Gray Davis, but not much better. And FYI, I get “ill” when I hear you using a “money talk” program to demagogue your own political opinions like you did when you said "Joe the plumber" was "fiction."
Or like when you spoke so disparagingly about Sarah Palin -- as you so typically do with all strong women. I'd be happy to tell you this to your "face" but all I get is busy signals even when I call every 15 minutes. Do you have your calls set up for the whole program ahead of time? Sure seems strange that there would never be a call from anyone who is the least bit unhappy about the huge losses they have incurred by following your "market-timing advice.")
BALANCED PORTFOLIOS: Brinker said: "Now we’ve just seen something happen in the stock market that was unprecedented. But if you had a balanced portfolio which was bolstered by quality bonds, yes, you’ve taken a hit – but it hasn’t been a hit that is something that you cannot absorb, and something that you can come back from.”
Honeybee EC: While that may be a true statement, what he failed to say is that two out of three of his Model Portfolios are not balanced and are fully invested, including a 15% holding in RYOCX. The numbers are not yet in for October, but we know that the market has dropped at least 20% in since September 30th.
We also know that at the stock market all-time-high last October, Brinker’s Model Portfolio I was valued at $302,561. On September 30th it was valued at $224,888.
OIL BLACKMAILERS: Today Brinker talked about the drop in oil prices from the perspective of gloating about the “oil blackmailers," getting a comeuppance, but he made no mention of the fact that he was completely wrong about the “inverse correlation" between the price of oil and the stock market. He stopped mentioning this theory when oil and the stock market began to drop in tandem.
July 13, 2008 (S&P 500 @ 1239.49 -- Oil at 144.95) Moneytalk Bob Brinker said: “One of the topics we’ve been talking about on Moneytalk is what has been going on in the stock market and how that has been related to the price of a barrel of oil and the correlation that we’ve been discussing on Moneytalk. I think the stock market really is marching to the drummer known as oil right now. I think oil prices are the ax right now in the stock market."
Oil was about $125 per barrel when Brinker wrote the following: August 5, 2008 Marketimer, Page 3; Paragraph 3; "In Summary, we continue to regard oil prices as the key variable for stock prices."
Brinker was bemoaning the removal of the short-selling uptick rule, and blamed it for the steep decline in financial stocks. Another school of thought shows that during the ban on short-selling, financials declined even more steeply. Here are some excerpts from an article just published at Wealth Bulletin:
"Industry insiders have called the Securities and Exchange Commission’s ban on short selling against financials a failure following the regulator’s decision to end the three week old action on Wednesday at midnight.
One motivation for the short-selling ban was to make it more difficult for companies to drive down the price of financial stocks.
Among other provisions, the SEC expanded disclosure requirements to force companies to reveal bets they made against companies. The regulator also toughened a rule against naked short selling, which prohibits fund managers from betting against a company's shares if it has not borrowed the securities.
The SEC said it let the ban expire following the president’s signing of the Emergency Economic Stabilization Act, the much-heralded bailout designed to ease the credit crunch.
Global financial stock prices have continued to fall despite the US ban and a similar short selling ban imposed by the Financial Services Authority in the UK which is expected to end in January.
Bottini said: “This has been a failure. The numbers say it has not done what its goal was.”
Brinker’s Saturday guest-speaker was Paul B Carroll: Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years
Brinker had Scott Rasmussen scheduled to be guest-speaker on Sunday, but he was a no-show.
If you missed Moneytalk this weekend, I highly recommend that you go to KGO810 Archives. You can either listen or download it to your MP3 players or Ipods and listen at your leisure. They have both programs available for seven day and best of all, IT IS FREE.