Bob Brinker opened Moneytalk with a monologue today. He reported the closing stock market prices for the S&P 500 Index, the Dow, the Nasdaq Composite and the Nasdaq 100 Index. Brinker said: "The S&P 500 Index having another good week gaining a little bit over six points for the week at 946 and change. That brings the total return, including the cash dividends paid, year to date on the S&P 500 up to just about the 6% mark......"
Brinker also gave the current yields for Treasury securities, and said that the implied 10-year inflation rate is now at 1.93%. [Honeybee EC: Please check the right column of this blog under the title: "Items of Interest to Investors." I posted links to all of the fixed-income data that Brinker recited.]
Market Numbers for the Week:HYPER-INFLATION PROTECTION:
* The Dow closed Friday at 8799.26; up 0.4%.
* The closed at 1858.80; up 0.5%.
* The S&P 500 Index closed at 946.21; up 0.7%.
* Oil closed at $73.48, up from $68.
* GLD closed at $92.17.
Caller Phil from Sunnyvale asked Brinker what he recommended for "hyper-inflation" protection.
Brinker told Phil that TIPS (Treasury Inflation-Protected Securities) are a very good way to protect against inflation. He said they are available through no-load mutual funds, ETFs (Exchange Traded Funds), and they can be purchased through Treasury Direct. They pay a base rate in addition to the CPI rate of inflation. However, they should be owned in a tax-deferred account because the price increase is taxed.
Caller Bill in LaCross asked Brinker how I-bonds stack up against TIPS.
Brinker said that I-bonds are okay for inflation protection but you can only invest $5,000 annually. The limit used to be $30,000 annually.
Caller Don from Boston asked if the stimulus package would create more bureaucracy.
Brinker told Don that it was not the stimulus package that would create more bureaucracy. Instead, it was the massive new programs that are being discussed in Washington. He said they could be "gargantuan" when they are finished with them. The part of the stimulus package that Brinker likes is the tax cut that started in April which gives wage-earners an additional $60 a month. He likes it because he believes "these people" will spend the money. Brinker said that it is good that the "high earners" didn't get it, because they "don't need a tax cut."
Caller Victor from Belmont, California asked Brinker what would happen to Ginnie Maes if interest rates rose to 9% because of inflation in a couple of years.
Brinker said: "The Vanguard GNMA Fund right now has an average maturity of 3.4 years, so that would be the maturity range that you'd want to be looking at......the average duration on that fund is only 2 years......That's where it's going to have an impact on the share price primarily........Three year Treasury Notes are yielding 1.9 and five-year Treasury notes are yielding 2.78, so we can interpolate quite easily that 3 1/2 year Treasury notes would have a yield of approximately 2.1......
.......So now you're saying what happens if a couple of years from now that rate is 9%, right? That's what you're saying? [Victor: "yeah"] Okay, I just wanted to get it straight..... So you're saying what happens to the price of the Ginnie Mae Fund if it continues to have a duration of 2 for the next couple of years and if rates go from 2 to 9, that's your question. And the answer is that the net asset value would decline about 14%.....
.....But you know it's interesting, you chose 9%. You could of chosen 50%, 100%, 30%, 5%, you chose 9%. Let's also understand the implications of what you're saying......I think listeners need to walk this walk.....What are the implications for the American economy, and Americans in general, if two years from now, the 3 1/2-year Treasury rate is 9%?........[Victor: "It could destroy it."].....Of course, it would destroy it. There's no possible about it.....It would destroy the American economy and it would push the American economy, at the very minimum, a very severe recession.....
...... So you have to understand what you're talking about here. If rates go to 9% on 3 1/2-year Treasury paper in the next 2 years, the U.S. economy is the Titanic..... You said that this would destroy the American economy and your comment is correct, I have no quarrel with it at all. But remember what that means. That means then that Ginnie Mae prices would rise as the economy would sink right back into recession. And as the economy would sink back into recession, rates would come back down and net asset values of Treasury-backed paper would go back up."
Caller Victor said: "I've heard you comment over the air about the possibility of inflation......"
Brinker said: "Of course there's the possibility of inflation. I stand by that, that there's the possibility of inflation. And the Fed has to guard against inflation as it goes down and it tries to extract all of the excess liquidity that's placed into the system.....And I guarantee you it will worry about inflation and that's one of their jobs. That, along with maximizing employment consistent with low inflation. That's their dual mandate.......It's critical."
CALIFORNIA GENERAL OBLIGATION MUNI BONDS:
Caller Eric from Rancho Mirage asked about "California Muni's" He said they were about 1/3 of his portfolio and that his broker said don't worry about them. He wanted to know what would happen to them if the State of California goes "belly up."
Brinker said: "You're talking about General Obligations of the state, is that right? If the state goes under that doesn't speak for a city......My opinion has not changed. I have said this on Moneytalk. I consider the state of California the poster boy for fiscal irresponsibility.....Now I also have a holding in the State of California that's a General Obligation. I have other California holdings that are pre-refunded. That means they're backed by Treasuries. So I can hold them to maturity and I have Treasury backing, even though they generate tax-exempt interest. Those securities, of course, are triple-A.....
......But I do have one holding of the State of California General Obligation and it represents less than 1% of the money that I have invested. So if anything were to happen, it would frankly be immaterial. So you're in an entirely different position with 33% in California. I would say to you that California is the most fiscally irresponsible state in the United States. And the legislature in Sacramento should collectively hold their heads in shame for the way they have mismanaged the finances of a great state." [Honeybee EC: It's obvious that Brinker meticulously avoids mentioning Schwarzenegger by name or putting any blame on him.]
The caller asked: "My direct question is, should I sell them all off or should I sell them half off and I realize they are individual cities in California."
Brinker said: "I would limit my exposure to any one issuer to no more than 1%. So that way if one of your issuers does go bankrupt, be it the State of California or one of the cities -- and there are already rumors today about the possibility of Oakland, California declaring bankruptcy.....We've already seen the city of Vallejo, California declare bankruptcy. We all know.... the fiscal troubles in San Diego, California. There's nothing stealth about any of this, it's all out there......Sacramento is a fiscal train-wreck."
The caller asked again: "So you are basically telling me that I should sell off my various California Munis before something happens. Am I reading you right?"
Brinker said: "I would never place myself in the position where I would tell you to buy or sell a specific issue. I'm here to talk about the subject, and my specific recommendation on this would be the one I've given myself -- limit your exposure to any given issuer in the State of California, including the state, to no more than 1% of a portfolio.....This is Moneytalk."
"RICH PEOPLE" SPEND MONEY TOO:
Caller David from Maryland called to disagree with Brinker that anyone making over $250,000 a year doesn't "need a tax break." David said he made over that much running a small business and argued that he would also spend his money. He might hire new employees, or buy a new car, or computers for the business. He pointed out that the Bush tax breaks will be expiring -- and that Obama is going to raise taxes again, which may even cause him to have to fire some employees.
Brinker told David that he was not talking about the same thing, that he was only talking about the stimulus package. [Honeybee EC: The fact is, David's premise was that discriminating against "certain" taxpayers, which Brinker had just advocated to caller Don from Boston in the first hour, may have unintended consequences. I think David was right on the mark. However, Brinker ignored the point of his call and zeroed in on a minor detail and brushed the caller off -- rather rudely, in my opinion.]
TAXING EMPLOYER HEALTH-CARE BENEFITS:
Caller Ralph in New Jersey asked Brinker if he thinks it would be right for Obama to tax employer health care benefits.
Brinker said that he thinks Washington is at "loose ends" right now wondering how to pay for their new health-care program and they will look every place they can to find revenue -- because they are "drowning in red ink."
TAXING MEDICARE BENEFITS:
Caller Jack from Massachusetts said that for every dollar the Federal government spends on children, six dollars were spent on the elderly, including wealthy retirees. He suggested that it would be fair to tax Medicare benefits like they do Social Security.
Brinker thinks this will be one of the issues that Washington will be looking at. Brinker asked: "You know the reason that we see $6 spent for every senior relative to $1 for every child. You know the reason for that. What's the reason for that?"
Jack answered: "Children don't vote, the elderly do."
Brinker responded, "You got it. The voter turn out on seniors is the highest voter turn out percentage for any demographic group in the United States. They win every time.....Children are not eligible to vote, so they have no voice. They have no constituency. They have no American Association for Children."
[Honeybee EC: In my opinion this was a planted call. It was entirely too convenient that this caller's statistics were so readily accepted as fact by Brinker. Whether or not the statistics are true (I don't know), this may be one of the SILLIEST things that Brinker has ever said. Children certainly do have a "voice," "constituency" and "Association for Children." They are called parents, Mr. Brinker! Believe it or not, there are still multitudes of parents, e.g., MOTHERS AND FATHERS, who responsibly pay for their own children's health care through insurance or other means.]
Thanks to Jeffchristie for supplying this information: The president signed the Children's Health Insurance Program Re-Authorization Act of 2009:
The Children's Health Insurance Program Reauthorization Act expands the State Children’s Health Insurance Program (SCHIP) and reauthorizes it through 2013. SCHIP, founded in 1997, currently provides health insurance coverage to 7 million children from low- and middle-income families that cannot afford private health insurance but are not eligible for Medicaid benefits. The program is jointly financed by the federal and state governments and is administered by the states.....HUB CAP THEORY:
Caller Everett in New Hampshire and Brinker went a few rounds because Everett said that jobs were leaving the country because the Fed was printing money. Brinker said no way, it's because of "globalization" -- "The "Hub Cap Theory."
HEALTH-CARE REFORM STAND ALONE ISSUE:
Bob Brinker said: "It is disingenuous for anybody in Washington to tell you, as they have told you this year, that economic recovery is tied to health-care reform. It is not true that economic recovery is tied to health-care reform. Health-care reform is essentially, relative to the health of the economy, it is essentially a stand alone issue -- and a very tough issue. But it is not directly tied to economic recovery. And it has saddened me that the politicians in Washington have conducted themselves in a totally disingenuous way by telling the American people this year that the two are tied together. They are not tied together."
[Honeybee EC: When it comes to Brinker's political-punditry, the lengths that Brinker goes to in order to avoid specifically blaming Barack Obama for anything always astonishes me. Brinker seems to not even know the name of the man in the White House -- he almost never speaks it.]
CALIFORNIA FISCALLY IRRESPONSIBLE TRAIN WRECK:
Betty in Corona Del Mar said she had about $150,000 in California Municipal Bonds and California State Bonds, and she was worried about them.
Brinker repeated what he had said earlier about California being the most fiscally irresponsible state in the country. He said he thinks Sacramento is a fiscal train wreck. He repeated his advice to limit California bonds to 1% of a total portfolio.
ONE REASON WHY CALIFORNIA IS A "FISCAL TRAIN-WRECK":
Brinker said: "It's unfortunate that California has been burdened with a tremendous amount of additional expense due to things like people getting across the porous border -- things like that. It's not just California. It's also Arizona and it's also Texas. Some of those expenses have bled into other states too, in the Rockies but the reality is that California has been the hardest hit. So it's not entirely the fault -- part of it is just geography. It's just bad luck of the geography of California has placed it in the flow of all this additional expense that's been placed on the taxpayer of California. It's unfortunate....
IF CALIFORNIA "GOES UNDER," FED MAY OR MAY NOT PAY BOND-HOLDERS:
".....If the state goes under, if they have to declare bankruptcy, if the state has to follow in the footsteps of Vallejo and declare bankruptcy, then they would be at the mercy of the federal government at that point. And it would be up to the federal government whether they wanted to pay any money to the bond-holders. They may or may not, they may or may not. No way to know that one. But make no mistake about it, as a fiscal unit, the state of California is a train-wreck......
......State of California Bonds have not yet collapsed. And if the state can find a way to be fiscally responsible then that will be a plus, but that has not yet happened. But we're making this discussion about California at a time when the bonds have performed reasonably well. And so we are not talking about California after the horse has left the barn. The horse is still in the barn. California bonds are still trading and California bond funds are still trading reasonably close to the bond funds of other states. That does not change the reality of what we talked about. Sacramento is a fiscal train wreck."
[Honeybee EC: Today, Bob Brinker did a complete 180 degree turnaround on California State General Obligations and the possibility of California going bankrupt. He has been telling callers for months that they were safe and that the Federal Government would not let California go bankrupt -- because it was "too big to fail." Now he even questions whether or not the Feds would pay state bond holders.]
Bob Brinker's Saturday guest-speaker was Jerry Flint, auto columnist for Forbes Magazine. Flint's June 10th column titled, "Yes, New Auto Plants Will be Built: Foreigners will build factories to replace the GM and Chrysler sales that are going to disappear. Where will the plants go?"
Here's an Amazon [LINK] to Jerry Flint's book, "The Dream Machine: The Golden Age of American Automobiles, 1946-1965" [I haven't read this book yet, but it sure looks like it might be on my Christmas list for my brothers and my son.]
Brinker's Sunday guest-speaker was Kate Kelly. Here is an Amazon [LINK] to her latest book: "Street Fighter: The last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street."
Moneytalk programs are available 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]
A beauty-break from my Idaho sister-in-law:
It rained last night near Boise, Idaho. My sister-in-law sent the same plant with raindrops on it. Click on it to enlarge.