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Saturday, June 6, 2009

Bob Brinker's Moneytalk Summary, Commentary and Excerpts, June 6, 2009

[Sunday update added below]

June 6, 2009, Bob Brinker began the program today by giving the closing numbers for the Dow, S&P and the Nasdaq. Brinker commented that GM (60% taxpayer owned) and Citigroup (34% taxpayer owned) were "unceremoniously dumped" out of the Dow and were replaced by Traveler's and CSCO.
Honeybee's Report:
* The Dow closed Friday at 8,763; up 3.1% for the week.
* The Nasdaq Composite Index closed at 1849; up 4.2% for the week.
* The S&P 500 Index closed at 940; up 2.3% for the week.
[Markets are up almost 40% since March 9th low.]
* Oil closed at $68, down from over $70 earlier.
* GLD closed at $93.71.

Brinker said that short-term Treasury yields remain at historic lows. The 3-month Treasury Bill is yielding 17 basis points = 0.17% annualized. The 6-month Treasury Bill is yielding 30 basis points annualized; two-year Treasury Note yield is 1.3% annual; five-year at 2.85%; ten year at 3.86%, thirty year bonds at 4.65%.

IMPLIED INFLATION RATE.....Brinker said that the implied inflation rate (for the next ten years), which is the difference between the ten-year Treasury Note and the ten-year Treasury Inflation Protected Security, is 2.04%.

Brinker then moved directly to callers.
[Honeybee EC: It's been several weeks now since Brinker has done any significant monologues. All of these years, his monologues at the beginnings of hours one and two have usually taken up the lion's share of the first half hour. Is this a permanent program-format change?]

EASY WAY TO INVEST IN STOCK MARKET.....Caller Jay said he was moving "back into the market." [Honeybee EC: Obviously, if Jay is getting "back into the market" now, he did not take Brinker's advice (which hasn't changed since 2003) to keep all stock market money fully invested -- including during the 2007-09 mega-bear.] Jay asked Brinker if there was an "easy way" to get back into the market.

Brinker recommended the Total Stock Market Index
. [Honeybee EC: Brinker prefers VSTMX, or VTI, its equivalent ETF.] Brinker said that for the "individual investor," he prefers the Total Market Fund over the S&P 500 Index Funds because it includes small-caps and mid-caps while the S&P is mostly large-caps. Brinker said that these funds can be purchased with very small expenses and also have a high level of tax efficiency, so are a very good way to match market performance without having to pick individual stocks.

VANGUARD GNMA FUND - VFIIX .....Jay also mentioned
VFIIX and asked Brinker if he thought this might be a good time to "move out of Treasuries."

Brinker replied:
"There's no change in my view that we are going to be looking at the Vanguard Ginnie Mae Fund trading in a range of approximately $9.50 to $10.50. Right now it's at the high end of that range -- it's $10.54 a share. It's been a couple of a percent higher this year, but I haven't made any change to my estimate that we are going to be looking at this trading roughly between the $9.50 and the $10.50 area. So that then becomes the question whether you are capable of accepting that level of price differential."

In the second hour, Joe in Palm Beach asked Brinker for some "input" on VFIIX and said he heard that "Treasury Bills are not going to be a good bet in the next 12 months."

Brinker replied that Treasury Bills are not
a real good bet right now because of the low yields. Brinker repeated exactly what he had told an earlier caller about Vanguard GNMA Fund (VFIIX). Then Brinker said: "My estimate is that that share price has a probable range between roughly $9.50 and $10.50. That's not something that's changed. That's a view that I've held for many, many, many years. So yes, you're in the top end of that range right now. So if you're going to own that for interest income, then you have to accept the fact that it has a range.....It's not a fixed net asset value. And that's the reason that the yield on the fund has really been way higher than anything you can get in the Treasury market.....But my personal view is, given the fact that the Treasury is going to be issuing $trillions of debt in the years ahead, I don't see any reason to change that expected range from the $9.50 to $10.50 area.

[Honeybee EC: My interpretation of what Brinker is subtly trying to get across to callers is that if you own VFIIX, be prepared to lose at least 10% of your NAV. What he's not saying is how long he thinks it might be before the fund ever returns to the top end of the range again -- the way things are going in Washington, it's definitely something to think about.]

NATIONAL DEBT....Caller Ron said
he had read that our national debt was $65 trillion, and asked Brinker if he thought we would ever be able to pay that back.

Brinker replied:
"The only way they are going to be able to pay back this obligation is for fiscal responsibility to return. Right now, we don't have that. We have the opposite, we have drunken sailor spending in Washington.....And we would need a restructuring of the Social Security and Medicare Programs in order to meet those obligations. The reality of the situation is, we are in a government right now that is issuing debt at a feverish pace. I like to call the bonds being issued by the United States, Obama Bonds. The reason is, we are hearing reports that up to $5 trillion of Obama Bonds could be issued in 2009-2010. This takes spending to a level that in the past has never even been remotely contemplated. For any government to sell close to $5 trillion in debt over a two-year period is frankly unconscionable......

.....So this is what we're looking at right now. We are running the national debt up at a bizarre pace. In fact, the latest figure in from the Congressional Budget Office says that the US deficit could be up to $17 trillion within the next decade. And the interest payments for the US national debt, within the next decade, could rise to over $800 billion. Now they're only $170 billion annual right now with rates down. Can you imagine with higher debt outstanding and some changes in rates, what it will be like to pay $800 billion a year in interest on the national debt. What we have right now in Washington DC is government gone wild."

IMPACT OF DEBT ON BONDS....Caller Bob in Sacramento asked:
"As the national debt increases and the interest payments increase, we begin to run out of money, when will that begin to affect interest rates for the rest of us and what do see that as impact on the market on what period of time?"

Brinker replied:
"Well I think the impact on the bond market is that there's the risk that over time, you could see rising rates on this particular debt.....It's all supply - demand. Right now the Treasury is coming out with massive amounts of bonds, but they're not competing much with corporations or individuals. When the economy recovers, then to have to compete with corporate borrowing and individual borrowing, that could put more pressure on rates at that time......

.....The United States is addicted to borrowing at the federal level, at the Treasury level. The officials in Washington have let down the American people by basically getting on this debt addiction. And right now there is nothing on the horizon to turn that around.....This interest burden on the American people, as I have said, reduces the potential for long-term economic growth in the United States by keeping interest rates higher than they otherwise would be for all borrowers.....So it costs everybody more money than it should......Without some outside influence toward fiscal sanity, the members of both parties in congress spending like drunken sailors--it doesn't matter which party has the majority, they've proved that -- they're just spenders gone wild, in either case."
[Honeybee EC: While I agree that both parties spend "like drunken sailors," Brinker is remiss in not pointing out that Obama has quadrupled spending over Bush since he took office.]

.....Bob Brinker answered a tax question incorrectly today, but after the caller seemed to "jog" his memory, he gave the correct answer. [Honeybee EC: it behooves one to know the answer to your tax questions before you ask Brinker -- or at least get a second opinion, like he often suggests. He has misled others on this subject over the years.]

Ken in California asked:
"I have a question on capital gains. My wife and I have owned this home for 11 years and now we plan on renting it and the question is, how long can we rent that.....before we need to sell it in order to capture the capital gains without paying tax on that?"

Brinker replied:
"I don't see any reason why that would have any effect on your holding period of the asset. You've owned it 11 years. If you rented it out for ten, you'd own it 21 years, it would still be a capital asset. The only accounting change that you would have to be aware of would be any depreciation that you take once it becomes a rental property, and you'd have to reconcile that to your tax man at the time that you made a sale of the property. It wouldn't, I don't think it would have any effect at all on your holding period. Your holding period is going to be remain the date that you purchased the property. So you have a long-term capital gain right now in the property, and the only adjustment that I would be able to think of would be any depreciation adjustment should you depreciate the property once it becomes a rental."

Ken reminded Brinker:
"But isn't there a rule that says I must live in the house two out of five years? So am I confused here, saying that I have lived it for 11, now I'm going to rent it for 5 or 6 more. I still lived in it, the total then when I sell it I still lived in it the 2, I don't understand the 2 out of 5 years rule or maybe I'm....."

[Honeybee EC: probably slapping himself on the forehead] replied: "Well, that, no that, that, that [Honeybee LOL!] would not help you because if you rented for 5 years, that means you have not lived in it at all for the past 5 years. So that would mean you would not be eligible to take the tax-free gain on a married couple of up to $500,000. In order to qualify for the tax-free gain, you would have to meet the residence requirement. If you rent it out 5 years, you cannot meet the residence requirement."

Ken asked:
"So if I rent it out 3 years and would sell it on that particular day, then I would meet those requirements?"

Brinker replied:
"Yeah, you have to live 'X' years out of the last 5 years in order for you to qualify.....[Honeybee EC: "ROAR".... Brinker knows he's back in charge again, no harm, no foul, "NOONE" will know he blundered except that doggone pesky Honeybee. LOL!] Certainly you could rent it out, no question you could rent it out for a couple of years.....And you might want to check with a CPA or an enrolled agent in California on the details on that. Because you have to get that right, otherwise it would be disallowed in terms of the exclusion of up to $500,000 in gains at the federal level and then whatever California does in reference to that."

Bob Brinker's Saturday guest-speaker was Dan Ariely, "Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape our Decisions" [LINK to purchase this book from Amazon]

Brinker's Sunday guest-speaker was Gillian Tett, "Fool's Gold, How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted By Wall Street Greed and Unleashed a Catastrophe." [LINK to purchase this book from Amazon]

Sunday, June 7, 2009 Update

Bob Brinker did an opening monologue on Sunday. he covered some of the upcoming economic reports that will be coming out next week, including the Federal Reserve Beige on June 10th, the Trade Balance and Retail Sales. [Please check the “Items of Interest to Investors” section in the right hand column here for a list of links to these reports.]

IT’S ALL CONGRESS’ FAULT NOW: Several times today, Brinker made the case that it is “congress who spends all the money.” [Honeybee EC: In some of Mr. Brinker’s previous political-punditry, he must have forgotten that there was a Democrat majority in congress during Bushs’ last two years in office – when the original TARP Stimulus Package was signed.]

The fact is, it is the person who has been in the Oval Office less than 5 months, who demanded that congress sign the $787 billion “economic recovery bill” without allowing time for anyone to read it, and it was him that signed the $410 billion omnibus bill, and it was to satisfy him that congress approved a $3.4 trillion budget for next year – according to CNN: "Congress approved a $3.4 trillion budget for the coming year Wednesday, approving most of President Obama's key spending priorities including increasing in health care, education and alternative energy spending."

GENERAL OBLIGATION MUNI-BONDS…..Caller Ron asked Brinker about the safety of municipal bonds. The caller pointed out that the “other fellow” who did the program is “negative against them.” He no doubt meant Bill Flanagan. Flanagan is not as sure as Brinker that California is "too big to fail."

Bob Brinker replied: “Since I own municipal bonds, I certainly am not negative on municipal bonds. If I were negative on municipal bonds, I wouldn’t own them….."

Later, Caller Randy said that a major part of his portfolio is in municipal bonds and he too wondered about the safety of them. Randy said, “I’m concerned about the ability of our government agencies to even be able to repay the money if they continue like they are.”

Bob Brinker replied: “I think that General Obligations are one way to go with this. If you have General Obligations, you have a better track record of repayment than with revenue bonds….. So I would say that if you’re going with entities that have good ratings, and I’m not talking about the insurance company rating because that may or may not be worth anything, I’m talking about the underlying rating on the credit. Then I think that’s the way to go. If you own individual bonds and you hold them to maturity and they’re good credits, you should be okay."

[Honeybee EC: Brinker did not mention California General Obligations specifically, but he did not exclude them either.]

Moneytalk is offered free on your "demand" at KGO810 radio for seven days after broadcast. You can download and save Bob Brinker's Moneytalk programs (owned by ABC) and listen whenever you choose at no cost whatsoever. To download the programs to your MP3 player or flash drive, just choose the day, then right click on the hour that you want and use "Save Link as." KGO Moneytalk Archives [Link]

With so much dangerous spending going on in Washington these days, spending that may actually threaten the fabric of our Republic, these pictures that Dixiegeezer sent seem especially apropos. The building where the Revolutionary War began and a stunning picture of the Washington Monument:


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