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Friday, September 17, 2010

Bob Brinker's Moneytalk: Summary, Part Two

Last Sunday, Bob Brinker's Moneytalk program covered some important miscellaneous information. Bob Brinker's comments paraphrased and summarized:


Beginning in 2010, anyone can convert to a Roth IRA, regardless of income. All converted income is taxed at ordinary income tax rates. If you convert before year-end, you may split the tax liability in equal amounts between 2011-2012. However, the value of deferring tax liability over those two years, could possibly be offset by tax rate increases.


A caller was concerned about the marked increase in the turn-over rate in the Vanguard GNMA Fund (VFIIX) based on something he read from Vanguard.

Brinker rather adamantly explained that he what he cares about for that fund is the net-asset-value and beyond that, he defers to the fund managers. And Brinker said that the duration of the holdings in the fund has come down over a period of years which demonstrates to him that the fund managers are aware of interest rate risk and know that if interest rates rise the NAV will decline.

Brinker pointed out that the fund had done exceptionally well, but suggests that anyone who is nervous about the fund's NAV, establish a mental stop loss, such as $10.90 which is about 1% below the current price. [A couple of months ago Michael Garrett of Wellington Management Company was named sole manager of VFIIX. Before that, he was co-manager with Thomas Pappas from 2006-2009. Pappas is leaving Vanguard at the end of the year.]


Brinker reminded listeners that he has warned about municipal bond investing where the issuing entity has precarious financial footing. He said that he is comfortable investing his personal money in state general obligations. The only bond that is not a state general obligation that he personally owns are GOs issued by the City of New York --he only buys quality.

There are many types of municipal bonds available for purchase but that can get you in trouble. For instance, Harrisburg, Pennsylvania is getting bailed out this month by the state so they can make a bond payment of $3.3 million. The city went down hill after borrowing $225 million from the state -- a shocking amount for a city even of that size. Brinker said he still doesn't know how they will pay their debt load, and noted that in the Commonwealth of Pennsylvania it is legal for a city to declare bankruptcy -- and no doubt, there will be Harrisburg bond holders that are totally caught of guard by this development.

Another caller asked Brinker what he would consider a good quality GO Bond. Brinker said that in his view, anything with a AA or higher would be a high quality general obligation bond. Two examples of states with that rating are Georgia and Virginia.

Forbes article speculating about other cities becoming "muni-bond deadbeats."

Brinker pointed out that this issue shows the critical difference between GOs and Treasuries. US Treasuries are backed by the power of the federal government printing press. Whereas, State and local governments are not. Some states, despite claiming a balanced budget are simply blowing smoke. For instance, Sacramento, California which plays budget-games almost every year.


A caller who said he was watching a biography of Warren Buffet, said that Buffet doesn't believe in market diversification. Brinker said that he simply did not believe that even though, he knew Buffet said it. Brinker said that Buffet is a sharp guy and knows the value of diversification because he has owned many companies -- although concentrating in the consumer and insurance area. Brinker went on to point out that Buffet has put a lot of money in Burlington Northern Railroad, which might explain why he said that about diversification. However, Brinker said that Buffet would never not recommend diversification.

Buffet has already made $14 million on his Burlington Northern investment -- the railroad industry is hot. If you are interested in reading about Buffet's $14 million haul, here's the link.


A caller from the SF Bay Area said that in California, the inventory of homes are going back up and wondered if prices would decline further and create a real estate panic. Brinker said he was reading the second quarter S&P Case-Shiller Home Price Index and San Francisco has the number one position of the top 20 cities with year-over year gains of 14.3%. The caller was still concerned, so Brinker said that the tonic for this situation is just a matter of time.


A caller asked Brinker what he thinks of redeeming I-Bonds to purchase the GNMA Fund. Brinker adamantly said that he would not redeem I-Bonds to exchange for the GNMA Fund.


A caller asked Brinker about dividend reinvestment plans offered by utilities, telecoms or health stocks. Brinker said he had no problem with this low-cost way to invest as long as you are diversified, but may be more work than some people are willing to do -- but some like it. If you want more information about DRPs, Motley Fool has a nice write-up.


Brinker said that inflation is as low as it is likely to be for a very long time -- and is the lowest in decades. Brinker said he expects the low CPI and PPI report numbers to continue to show low inflation.

Brinker's guest-speaker last Sunday was David L. Scott. Scott talked about this book. His interview is still available Saturday and until 3pm on Sunday for free downloading at KGO810:

FrankJ sent this picture of Bambi he took in his yard:

And here is Bambi's mom. Don't believe anything you might have heard. 8)

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