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Wednesday, August 4, 2010

August 1, 2010, Bob Brinker's Moneytalk: David Korn's Commentary

August 4, 2010....Bob Brinker's Sunday-only Moneytalk program seems to be almost as informative as his Saturday program used to be. Bob Brinker has also begun to include more stock market discussions since the Saturday program was canceled.

David Korn writes a weekly investment newsletter, which includes a summary of Bob Brinker's Moneytalk. In my own summary this week, I focused on the interesting call about Brinker's market-timing, so here are some other interesting program topics that David Korn covered in his newsletter.

The following excerpts from David Korn's newsletter posted with David permission:

August 1, 2010 Newsletter


Brinker Comment: There is going to be a major battle in Congress about tax policy following the summer Congressional recess when politicians return in September. There are tax cuts on the books implemented from earlier in the decade that expire on December 31st of this year. Unless Congress takes action, there will be a whole new set of tax rates going into effect on New Year's Day of 2011. Bob said nobody seems to want the entire set of tax cuts to expire. The President has stated he is comfortable allowing the top tax rates to expire so that only individuals making over $200,000 (married filers making over $250,000) would be effected. The 35% federal marginal tax rate would go to 39.6% and the 33% would go to 36%. Bob noted that in the current economic climate, even some Democrats are starting to cast doubt on whether they want to let these tax cuts expire.

Brinker Comment: There is no doubt there will be a lot of wrangling over the many tax issues in play. The President appears to be in agreement on allowing the long term capital gains and dividend tax rates to go up from 15% to 20%. Congress is also going to be grappling with the estate tax which needs some resolution. And they still haven't figured out what to do with the Alternative Minimum Tax which the President wants to adjust for inflation. Congress keeps putting patches on the AMT instead of addressing head on. Bob gave his harshest criticism for the President's idea to cap deductions for things like charitable contributions.

Brinker Comment: Bob said in his opinion, now is not the time to raise tax rates. This is a difficult economic environment and you would be hard pressed to find an economists that think raising taxes would be a good idea in this kind of climate.

[David Korn] EC: Ironically, Alan Greenspan who Bob bashed a little later in the broadcast, said this weekend that he disagreed with the notion that the Bush-era tax cuts should be extended upon their expiration at the end of the year. Greenspan says he is in favor of tax cuts, but not with borrowed money.

Brinker Comment: Bob said if it were up to him, he would implement a 12-month extension of the tax cuts.

[David Korn] EC: The Tax Foundation has launched a calculator that allows taxpayers to compare their 2011 federal income tax liabilities under three scenarios: (1) if all the Bush tax cuts expire completely at the end of the year; (2) if they are all extended into 2011 or made permanent; or, (3) if President Obama's budget is adopted which includes a combination of expirations and extensions:


Caller: There is talk about the government selling its stake in Fannie Mae and Freddie Mac. How would that impact owning a GNMA mutual fund? Bob said he didn't see any impact. The GNMA situation was established in 1968 and this is a government owned corporation housed in HUD. The whole purpose is that a government guarantee could be provided to certain mortgages. Fannie Mae and Freddie Mac are different entities and so Bob didn't see any correlation to their status and the net asset value of a GNMA fund.

Caller: How long should you own the Vanguard GNMA Fund? Bob said it would depend on your outlook for interest rates, as well as whether you can tolerate net asset value fluctuation. Bob said the credit backing of GNMAs is solid and he has maintained a major position in GNMA securities in his balanced portfolio and fixed income portfolio. It has done extremely well and is trading at historic highs. Some people won't want to own GNMAs because of fear that the net asset value will decline when interest rates rise. Others just want to collect the interest and aren't worried about the daily fluctuations. The Vanguard GNMA Fund has been a great performer.

[David Korn] EC: The Vanguard GNMA Funds net asset value closed at $11.08 last week. Bob had previously stated that he thought the fund would trade in a general range of $9.50 to $10.50, so the fund has far exceeded his expectations. The fund has a year-to-date return of over 5% with a yield of about 3.19%.


Caller: This caller keeps hearing predictions that there will be a stock market downturn in the September/October time frame. Bob said there are always people out there that are going to be made forecasts on the upside and downside and you could pick any month for such predictions. You have to be able to separate good from bad and pay attention to those with a good record.
That said, even the ones with a good record, you have to understand that it is not always easy to forecast the future.

[David Korn] EC: Investors tend to get spooked about the month of October, perhaps because there have been some serious market crashes during that month. On October 29, 1929, the Dow plunged 12.8%, then went on to lose approximately 90% of its value. On October 19 1987, the Dow lost 22.6% of its value in one day. And more recently in October of 2008. The S&P 500 lost more than 27% in a month. On the other hand, I am reminded of Mark Twain's quote about speculating: "October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February."

Brinker Comment: Right now members of Congress are ignoring the $800 pound gorilla in the room which is the interest that we have to pay each year just to service the debt. For example, the interest alone on the foreign holders is $144 billion for calendar year 2009. And right now, we are borrowing money at low interest rates. The real problem is if we ever get into a scenario where the economy is doing well, then you could see some crowding out in the credit market. That occurs when the demand for money created by expanding corporations and individuals taking out loans causes upward moves in interest rates. Then you could have a major increase in the amount of interest that would have to be paid on this Treasury debt. This debt is a big deal. Congress should have put in a 10-year program to get rid of these deficits. Instead, they keep going on with their spending addiction and don't want to talk about it.


Caller: If Congress establishes a value-added tax, what percentage do you think it would start at? Bob said this is a very popular tax in Europe. If it happened, you could expect something in the teens or less. They wouldn't start it at a higher level than the teens and it is possible they would start in the single digits. What it would be is getting the "camel's nose under the tent." The objective of the proponents of a value tax is to get it on the books at some level. Then it can get jacked up down the road. The wonderful thing about the value added tax for politicians is that it is kind of a stealth tax where you aren¹t seeing your marginal tax bracket go up.


Brinker Comment: On the fixed income side, rates are so low, it is almost unfathomable. The Three-Month Treasury Bill has an annualized yield of just 14 basis points.

* The six-month Treasury Bill is paying 19 basis points annually.
* The one-year Treasury is yielding 25 basis points.
* The two-year Treasury Note has an annual yield of .53%.
* The Five-year Note is yielding 1.6%.
* The 10-year Note is yielding 2.9%.
* The 30-year Bond is yielding 4.0%.

[David Korn] EC: I don't like those numbers one bit. Think about it. Treasuries are probably the most heavily traded security in the world. And investors world wide are willing to tie up their money for just 60 basis points annually for two years? That doesn't pass the smell test. It's bothering me. The Wall Street Journal reported today that this is a record low in the 2-year Treasury. What's the market trying to tell us? For starters, it is reflecting the fear of a very long period of well-below economic trend. Looks like the concern has indeed shifted from inflation to deflation.


Brinker Comment: The Ten-year AAA Municipal Bond General Obligations are currently yielding 2.76%. if you were in the 35% top federal tax bracket, that would equate to a little over 4.25% taxable equivalent. That certainly isn't anything fantastic, but that's what is out there right now.

[David Korn] EC: I am not an alarmist at all, but the municipal bond market is bothering me a bit. If we get a few municipalities defaulting at the same time, could start an avalanche. I'd stick with general obligations in the muni market. Can't imagine the Fed not stepping in to bail out a state. But for local cities and things like transportation authorities and such, that's a different story. Check out the very well researched article entitled, "The Muni Debt Bomb" which was published two days ago in the WSJ by a Senior Fellow at the Manhattan Institute...."

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: David Korn and Kirk Lindstrom publish "The Retirement Advisor." Here are a few excerpts from The Retirement Advisor about muni bonds:

Municipal Bond Downgrades

"The problems with California’s budgetary crises have brought a new level of concern in the municipal bond market. As noted above, defaults in municipal bonds are rare. More likely and also worrisome to investors are downgrades. In the first quarter, Standard & Poor's Ratings Services downgraded 327 municipal issues. That already exceeds the total downgrades of 264 that occurred in 2008. A downgrade doesn’t necessarily mean the municipal bond is doomed. But invariably, a downgrade will result in a decline in the bond’s price value. Typically, the bond will continue to pay its fixed interest (although that is not always the case), but if for some reason you need to sell your holding following a downgrade, you will probably sell at a loss. On the other hand, if you own a diversified municipal bond fund, the impact on a downgrade of any one holding should have minimum impact. The bigger risk holding a municipal bond fund is interest rate risk. When interest rates go up, the bond fund’s net asset value tends to decline. More on municipal bonds in future newsletters."

You can get complimentary issues of David Korn's weekly newsletter and "The Retirement Advisor" at this [LINK]

The Retirement Advisor Portfolios

Dollar Value on 7/31/2010


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. Returns by year shown at bottom of page 10.

The Retirement Advisor Portfolio Performance
By Year Through July 31, 2010

Model Portfolio

2010 YTD




2007 to Now

#1: Aggressive






#2: Moderate Risk






#3: Conservative






I have read a sample of Bob Brinker's son's fixed income newsletter and in my opinion, David and Kirk's Retirement Advisor is greatly superior.

It's easy to compare and see if you agree with me. You can download a free sample of Brinker's Fixed Income Advisor from his website, and download a free sample of The Retirement Advisor here.

Notice that you will not find 2008 or 2009 performance numbers for Brinker's newsletter on his website. And remember that
this Bob Brinker is not the talk show host who publishes Marketimer. Many think that it is, and obviously, that is okay with both Bob Brinkers.

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