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Monday, January 11, 2010

January 9-10 Moneytalk Summary and David Korn Commentary

January 11, 2009...Sorry to say that I have been very sick since last week, so will not be writing a summary of Bob Brinker's Moneytalk for the January 9-10 programs. (The doctor says probably H1N1, but waited 3 days before seeing him and now all he can do is give me antibiotics to fight infection.)

However, I have a real treat for you -- excerpts from David Korn's weekend newsletter. Posted with David's permission:


Brinker Comment: The Municipal Bond Market and the fixed income market have both had good years. Ten-year AAA Municipal Bond General Obligations are currently yielding 3.28%. If you adjust that for a 35% top federal tax bracket, that would equate to a 5.05% taxable equivalent. The 30-year AAA Municipal Bond security is yielding 4.45% and that equates 6-7/8ths% for the top bracket.

(Korn) EC: I wanted to alert you all to an interesting new offering in the municipal bond market that is hot off the presses. BlackRock Inc.'s Ishares unit started the first municipal-bond exchange traded funds designed to liquidate at the end of a fixed maturity period. Six funds started trading on Friday. This is a pretty new product for municipal bond investors because it is liquid and tradable in its ETF form. I am going to do a
little digging into these and will report back.....


Brinker Comment: We received information on Friday about the employment situation in this country. The unemployment rate came in at 10%, but this number is slightly misleading because the workforce decreased in December largely due to discouraged workers. There was a decrease in the workforce of 661,000 in December. The unemployment rate would actually be higher if you counted the discouraged workers. The number of jobs on private payrolls declined by 84,000 in December from November. Bob said he thinks a better measure is the U-6 calculation, which includes people who have part time jobs who would like full time jobs and the people who have given up looking for work. That number is 17.3%, down from its record high of 17.5%.

The number of discouraged workers is up to 929,000 in the month of December. They started keeping this data in 1994, and last month is the record high. It is taking people longer to find a job as well. It takes unemployed workers an average of 29 weeks to find a job. That is a long time and is the biggest number since they started keeping the data in 1948. This causes a lot of grief in families when you have long term unemployment. It is no wonder workers get discouraged in this kind of situation.

(Korn) EC: There are actually several categories of employment measure the Bureau of Labor Statistics. The number that always gets reported is the U-3 which is the "total unemployed as a percent of the civilian labor force and is considered the official unemployment rate. U-6 is defined as the total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers." Marginally attached workers are persons who currently are neither working nor looking for work but indicate that want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.

Brinker Comment: Bob noted that we are hearing a lot of talk in Washington about creating jobs, but these are not long term jobs. These are more geared for specific projects, like building a road. Plus, these are jobs being paid for by taxpayers. That is totally different situation than having a long term job with a private company where your hard work creates revenue. One of the reasons that so many cities, counties and even states have had budget problems is because so much money has been drained out of taxpayer pockets to pay for government jobs. This is not a good economic business model for job creation. The only way you will get a sustainable and meaningful increase in job creation is for private enterprise and especially small businesses to do the hiring. Why are we seeing such reluctance from small businesses and private industry to hire right now? Why did we see a decline of 84,000 jobs in December even with an economy that has been recovering since summer? Bob said he thinks there has been a tremendous amount of uncertainty created by the politicians in Congress with reference to tax policy. Small business owners and entrepreneurs are looking at the potential change in tax policy and are holding back from hiring because they don't know what it will cost them.

Brinker Comment: A lot of people were disappointed at the reported 85,000 Job losses reported for the month of December, but keep in mind that job losses are much more moderate than they were last year when we were seeing hundreds of thousands of jobs being lost each month. Plus, another positive about the latest employment report is that the data for November was revised upward such that we actually had an increase in jobs of 4,000 for the first month in a long time.

(Korn) EC: Here is a chart showing the jobs gained by decade in the United States. This past decade is the first on record during which the number of jobs increased by less than 20%:

Chart of the day

Brinker Comment: You need to add about 1.2 million jobs a year in our country just to accommodate all of the people that grow up and enter the labor force. In the last couple of years, we have lost 7 million jobs, so you can see what kind of problem that has caused. This is one of the reasons you have seen interest rates kept so low by the Federal Reserve as one of their mandates is to maximize employment while maintaining low inflation. The government has not really come up with any kind plan for being helpful in terms of creating jobs. In fact, they have done the reverse by creating uncertainty about the tax code given the wide array of tax increase proposals floating around Capital Hill.


Caller: This 55-year old caller has been 100% in stocks for a long time. He can start collecting a pension at age 65 and wanted to know if he could view the pension, along with social security, as the fixed income portion of his asset allocation. Bob said he wouldn't adopt that approach. When you get to a point where you are approaching or in retirement, you should have a balanced portfolio with a general area of 50% allocated to the equity markets and 50% investment in the fixed income market. The pension fund money would give you cash flow on top of the cash flow generated from your portfolio and allow you to maintain a lower withdrawal rate.

Caller: This caller has a $4 million net worth and is invested in Bob's Model Portfolio III and uses the bond portion of that portfolio to generate income for his every day living. Because of the recent decline in the GNMA dividend, he is coming up short about $500 a month for his cash flow. He has to make an IRA distribution of about $55,000 for 2009 which he can do from a cash position and was considering purchasing some long-term quality bonds to generate about $250 a month. He also has some stocks that he could sell, but wondering if he should take some out of his inflation protection holdings. Bob said he would take $30,000 out of the distribution, put it aside and tap that for $500 a month which will cover you for 5 years.


Caller: This caller just had a large Certificate of Deposit mature and he wants to purchase some bonds with the money. He is concerned about net asset value declines in the bond funds he is going to purchase. Should he lump sum into a bond fund, or delay it over a period of 4-5 months. Bob said you can fully insulate yourself against net asset value decline by purchasing a ladder of FDIC-insured CDs with varying maturities and hold them to maturity. You will get 100 cents on the dollar at maturity and you can reinvest the money at prevailing rates. If you want to purchase a bond fund, dollar cost averaging a position over time can reduce the risk, but at the same time if you get into a rising interest rate environment you will see declining NAVs anyway.

Brinker Comment: We really have not yet seen declining NAVs in bond funds. Bob said he was looking at the Vanguard GNMA fund that he recommends. Adjusted for the seven cent distribution the fund paid in December, the fund would be trading at $10.74, which is not far from its all-time high of $10.90. Even though rates have moved some, it hasn't really impacted the NAV yet. Bob noted that if you are so nervous that you are watching interest rates all the time, you might consider whether you are more suited for an FDIC-insured CD.

(Korn) EC: The Vanguard GNMA Fund (VFIIX) closed Friday at $10.67. It has yield of 2.71% as of 1/8/2010.


Caller: This caller is in a position to add some money in the Vanguard High Yield Corporate Bond Fund, but saw that there is a penalty of 1% for not holding it for more than a year. Bob said he owns a small percentage of that fund in his fixed income Model Portfolio and is comfortable with establishing a position in for a year. Bob noted that the fund is yielding over 7% which is a tremendous yield in this market place. And we have been entering into a more sanguine economic period ever since summer. Plus a 1% penalty is not a huge deal. The caller than asked if the good run in stocks is what is helping the bonds here. Bob said what is helping bond funds like this is investors are feeling more and more comfortable about the credit markets and that we won't see wholesale corporate bankruptcies. As the healing process has continued, that is what you have been seeing in the high yield corporate bond market. It was rough for a while, but the run up in the high yield junk bond market and has recouped the vast majority on what it had lost on the downside during this recovery.

(Korn) EC: A lot of Trekkies were shocked when Bob first recommended the Vanguard High Yield Corporate Bond Fund (VWEHX) in his fixed income portfolio. It was contrary to what he had preached for a long time; namely, to not chase yield in the junk bond market. Bob justified the recommendation by saying it was only a portion of his fixed-income only portfolio. The fund then got creamed during the bear market, bottoming at the end of 2008, but has had a great run since.

Caller: A caller asked Bob why not go with the Vanguard High Yield Corporate Bond Fund versus the GNMA Fund when you can get 7% yield versus 2.7%. Bob pointed out that you have much more volatility in the High Yield Fund. Also, Bob pointed out that over the last 10 years, the GNMA Fund has actually done better that the High Yield by a sizable margin. The GNMA has had an annualized return of 6.23% versus 5.07% of the High Yield Bond fund. You made an additional 116 basis points per year with far less risk in the GNMA. The GNMA Fund has weathered the storm and continues to trade near record highs in recent months.

(Korn) EC#2: Junk bonds aren¹t my cup of tea for fixed income. Sure, its great when the yields are high, but you are paying for that extra yield with the risk that the underlying credit will default. My philosophy is you take risk on the stock side of the equation and the bond side you seek stability and very high quality. But if you want some exposure to junk bonds, at least a bond fund gives you diversification and Vanguard knows how to keep the expenses down.

[Honey EC: Brinker could not have picked a worse time to add (15%) Vanguard High Yield Fund to his Fixed Income Portfolio. I know from experience that if one is aware of what makes High Yield Bond Funds tick and uses some good "market-timing," they can be very profitable.]


Caller: This caller has $25,000 in GMAC that mature January 15th of this month. He was thinking of putting all $25K into the Vanguard Investment Grade Bond Fund and wanted to know if it was a decent fund to hold for the long term? Bob first expressed surprise that he was getting his money back from the GMAC bond, which Bob said was a miracle and that he benefited directly from the taxpayer bailout. If you decide to put it in a long-term bond fund, you have to expect to endure some pain because at some point, Bob said he thinks eventually long-term rates will rise and when that happens long term bond funds will be under pressure. For that reason, Bob said he would not be going there. If you are willing to hold it for the long term, Bob would rather hold a specific date-certain maturity such as a Treasury Note. A five-year note is yielding 2.60% and a 10-year Note is yielding 3.8%. The interest is taxable, but you will get your money back.

(Korn) EC: Interest income from Treasuries is subject to federal income tax. However, interest income from Treasuries is exempt from state and local income taxes. Thus, the higher your state and/or local income tax bracket, the more beneficial a Treasury can be. If you are subject to the federal alternative tax (AMT), it is also included in income for purposes of that tax.


Caller: This caller was reading an article that posited whether we have a bond bubble in the Treasury market, and noted that famed PIMCO bond fund manager is issuing strong warnings about the impact our government policies and the ability to finance the new debt in the future. Bob said he didn't think the term "bubble" applied to what was going on in the Treasury market. What happened is we had the worst recession since the 1930s and took rates down to record levels and at some point rates will adjust to more normalized levels. The internet dot com boom was a bubble, and we had a housing bubble, but it doesn't work for the Treasury market. The Treasury market is 100% guaranteed by the printing press so you don't have that credit risk in Treasuries.

(Korn) EC: Bill Gross just published his January 2010 Investment Outlook. If you are going to read any one article linked to this weekend, I encourage all of you to read this one. Recognize that Mr. Gross is not the all knowing, and certainly he is selling a product (his bond fund), but the stats that he cites in his article about the fiscal deficit, and how much the Federal Reserve has purchased is staggering. Gross believes it is unlikely that the US economy is stronger enough for the government to "gracefully exit" stimulus spending programs or that private investors are going to be capable of absorbing the balance in deficit funding. Check it out at this url:


Caller: This caller asked Bob if he had read the article this week about the famous hedge fund manager who had predicted the collapse of Enron and was not predicting that China¹s economy was headed for a crash. Bob said China is the most dramatic growth story in the world today. And it is reasonable to expect that it will be volatile. Bob said he would find common ground with anyone who was projecting high beta, and high volatility in Chinese stock prices. But to think that China will collapse right now is premature because China is a great growth story for a while. They are really early on in their industrial process. Having said that, you should continue to see dramatic earth-shattering volatility in the Chinese equity prices.

(Korn) EC: The caller was referring to James Chanos, the contrarian investor whose hedge fund, Kynikos Associates has about $6 billion under management. Chanos said that China's surging real estate sector is being flooded by speculative capital and he thinks that Beijing is cooking the books about its growth. An interesting take from a guy who has made a lot of money betting against conventional wisdom. Read more about what Chanos is saying
relative to China at this url:


Caller: This caller asked Bob to give him an estimate of what he thinks the base rate of the upcoming 10-year TIPS Auction would be. Bob said the base rate on the 10-year Treasury Inflation Protected Security is currently 1.23% based on trading Friday. That means in the secondary market you get 1.23% plus the inflation pay through. Bob said he expects the base rate in the auction this week to be very close to that as the auctions generally go close to the prevailing rates. You want to watch what is going to happen where inflation heats up. If that happens, you would probably see the base rate increase which would result in a depreciation of the net asset value although it would eventually come through at par value with the inflation add on. But if you had a TIPS Fund and had rising rates, you should expect the NAV to decline.

Brinker Comment: The 5-year TIPS have a base rate of 0.25%. 10-year TIPS have a base rate of 1.23%. 20-year TIPS have a base rate of 1.99% and the longest TIPS which mature in 2032 have a base rate of 2.0%. You add on the inflation pay through in all of this. We have seen periods when the base rate has gone higher and where it has gone lower.

EC: Here is a link to the upcoming Treasury Auction.


Caller: This caller had a bunch of CDs mature last week resulting in $1 million in cash that is now sitting in a federal credit union and he didn't want to take too much risk with hit. Bob told the caller that on Monday morning he needed to move at least $750,000 out of there because only $250,000 was covered by federal deposit insurance (through the national credit union association). Bob said he would use direct Treasury instruments and insured CDs.

(Korn) EC: With the creation of CDARS --- a service that can offer you up to $50 million in Federal Deposit insurance coverage at one financial institution, people have more options since it allows you to get around the FDIC $250,000 limit. It enables an individual, or charity, or whatever, to come into one single bank, deposit a great deal of money. That money gets parceled out into packets below $250,000 to as many banks as necessary and so the customer ends up owning the entire portfolio but has accomplished this by one transaction. You get one statement, but listing all of the CDs. If it is a taxable entity, there will be one tax return. People could do this on their own in principle, but it would be very time consuming. There are now thousands of institutions that offer this. Now all we have to do is get millions so that we have to worry about a problem like this, right? This link brings you to a the CDARS web site which has a list of all the financial institutions across the country that offer CDARS (which is an acronym for Certificate of Deposit Account Registry Service):


Caller: This caller read that I-Bonds purchased in early part of the last decade are earning a net interest rate of zero. Bob said that couldn't be right because the for I-Bonds purchased from November 2009 through April 2010, you get 3.36%. This includes a 0.30% fixed rate, and a 3.06% annualized rate of inflation. Bob noted that the six month annualized rate of inflation is based on the CPI from March 2009-September 2009. The caller said the Treasury web site is saying he is getting zero percent. Bob said there was a six month period ending October 31st there was a zero return for that period because of the deflation. But for the period beginning November 1st, you should be getting a positive rate of return. Bob noted that I-Bonds have been a good conservative investment, but the rates have jumped around. However, if you purchased I-Bonds several years back, you have been getting a good rate when compared to the current rates offered.


Caller: This caller noted that Bob had never been big on precious metals, but in light of the unprecedented debt financing an possible devaluation of our currency, do you think a modest position in the Vanguard Precious Metals and Mining Mutual fund might be a reasonable idea? Bob said if you want to do anything in that area, his preferred vehicle is the exchange traded fund that tracks gold (ticker: GLD). Bob said he still views gold as a speculation. When he hears people saying gold is going to 2,000 or 3,000 he is amazed because they don't know that. The price of gold by definition is a speculation. When you buy shares in a common stock, you buy because there is an increase in earnings and dividend stream. But when you buy gold you don't have that increase in dividends stream. Gold bouillon bars just sit and you pay for storage. You are speculating in what others are willing to pay for gold.

(Korn) EC: I watch gold pretty closely, and have been in and out of it in my newsletter a few times. Still looking for attractive entry price, but Bob's points where legit.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2010

Honey here: Thanks to David Korn for this great Moneytalk Summary and his commentaries. You can request a complimentary issue of David's weekly newsletter that contains much more than the Brinker summary. Also, David Korn and Kirk Lindstrom publish a monthly fixed income newsletter. David Korn's newsletter and The Retirement Advisor: [LINK]

More David Korn Links:

The Retirement Advisor Portfolios

Dollar Value on 12/31/09


Model Portfolio 1



Model Portfolio 2



Model Portfolio 3



DJIA 12,501.52 on 1/1/2007



S&P500 1,418.30 on 1/1/2007



The Retirement Advisor Model Portfolios all began with $200,000 on 1/1/2007

Honey's Market Report, January 8, 2010:
* Dow closed at 10,618 -- gaining 1.82% first week in January.
* Nasdaq Composite Index closed at 2317 -- gaining 2.12% for the week.
* S&P 500 Index closed at 1145 -- gaining 2.68% for the week.
* Gold closed at 1139, up from 1095.70 on January 1, 2010.
* Light Crude: $83.57, up from $79.62 last week.
* U.S. Dollar: DXY 77.16, down from 77.86, For the week, the dollar index fell 0.5%.

Brinker's Saturday guest-speaker was Matthew Richardson, editor of "Restoring Financial Stability: How to Repair a Failed System"

Brinker's Sunday guest-speaker was Erwann Miche-Kerjan, co-editor of "The Irrational Economist: Making Decisions in a Dangerous World"

Moneytalk FREE on Demand at KGO810 radio. Archived immediately after broadcast and available for seven days.
Saturday and Sunday 1-4pm. To download the programs and listen later, just choose the day, right click on each hour that you want and use "Save Link as." KGO Moneytalk Archives [Link] If you want to call KGO and complain about (or praise) Bob Brinker's Moneytalk, here are the numbers: Comments line: 415-216-1052....Listener services: 415-216-1050. Here is the KGO email address -- cut-and-paste it into your email compose window:

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