Bob Brinker talked about several subjects that many of you are interested in, so to conserve on length, I have included his monologues and caller-response excerpts, but will add my own editorial commentary in the comments section as the week goes on. Be sure to check the link at the bottom of this summary for those.
WHAT CAUSED THE 700-POINT STOCK MARKET FLASH CRASH?
Bob Brinker said: "We've had a number of calls over the last several weeks about the flash-crash back in early May. There seem to be about as many theories about what caused the flash-crash as there are people to expound on those theories..... We have a new theory now. This one courtesy of the Commodity Future Trading Commission and the SEC......This particular theory says that a large sell order in the futures market created the flash-crash. Now you can choose to believe this or not - that is up to you - but this is what they are trying to say right now as the latest explanation of the flash-crash.....
.....There had been another case of this many, many years ago, before the computerized trading had taken over the floor. That one was never really fully explained either. And now, the explanation that's coming out of the agencies is that this is because some mutual fund company - and there is speculation it might have been Waddell and Reed out of Overland Park, Kansas - but there's no confirmation on that.......And the speculation is that they wanted to hedge their mutual fund portfolios, so they dumped about 4 billion dollars worth of S&P futures, and the market fell out of bed......
.......Now this is not the largest mutual fund company - not even close. This is not a Vanguard. This is not a Fidelity........This is a mutual fund company that some people have heard of, some people haven't........Now they have acknowledged that they made a trade like this on the day of the flash-crash........But the explanation is that this is what caused the precipitous decline. I think most people feel as though a 4 billion dollar futures order in a market as big as the U.S. stock market, should not cause that kind of volatility. So I think that most people are going to be very skeptical.....and should be skeptical.....
......Seventy-five thousands e-mini contracts valued at about $4 billion can send the market on its way to zero? I think most people would be cynical about that explanation, but that is the best we have as of today. Of course, a cynic would say, well if you want me to believe that, what happens if a bunch of mutual fund companies decide on the same day they are going to put on a hedge like that? Suppose five or ten mutual fund companies - there are many mutual fund companies -- dozens....thousands. Well, I think the cynic would be on firm ground there that the inevitable conclusion is the market would be down around zero at that point.....
.......Suppose you had Vanguard in there with tens of billions of S&P 500 futures contracts for hedging....and Fidelity and T.Rowe Price......Well 700 points in a matter of minutes on a comparatively small order when you look at the size of the market. We're talking about trillions and trillions and trillions of dollars in market value here. But that's the best explanation they've come up here......
.......I told you you would not be happy with the explanation even if you got one......You've heard the theories - some of them have been expounded on the program - the financial terrorist attack theory.....the fractional trades, the canceled orders - you've heard them all. And many of you have been properly skeptical. Well this is what you're left with.....This is what you're being asked to believe at this point. I'll leave it up to you - whether you believe it or not....."
SACRAMENTO, CALIFORNIA "DYSFUNCTIONALITY ON STEROIDS"
Brinker said: "Another thing in the believe it or not category is the California budget impasse. Supposedly they have a compromise to come up to close this $19 billion annual deficit -- for one state. They've been at an impasse for the past 3 months and finally came up with a compromise......You shake your head in disbelief. How do you close an $19 Billion annual budget deficit? Well you get $5 billion from the Federal Government. WHAT? $5 billion from the federal government? Most people didn't know the federal government could send 5 billion dollars to help the California budget. That's taxpayer money, boys and girls - from the 50 states. They've also compromised on $7 1/2 billion on spending cuts......They are cutting money for schools.....They are cutting money for child care.....They're cutting health-care benefits and social programs.....
.....California, which is the 8th largest economy on the planet, has an $84 1/2 billion annual budget. So a $19 billion dollar budget deficit represents 22% of the annual budget. And as everybody knows, California is being strangled by incredibly high benefit costs being paid to government workers - government programs for government workers in California.....For any state to run a 22% annual budget deficit.... is really a shocking admission. But if you think the federal government in Washington, which just adjourned for the election, without passing tax policy - even for next year - then Sacramento is dysfunctionality on steroids."
[Honey EC: In my opinion, Brinker is understating the "incredibly high benefits costs" for government workers in California. In many cases, they are obscene! And in most cases, private sector worker's pay is MUCH LOWER. And the benefits that the taxpayers fund for public employees (at all levels) are mostly non-existent in the private sector. ]
COULD WE BE LOOKING AT STOCK MARKET ARMAGEDDON?
In answer to caller, Carl's, question about the flash-crash, Bob Brinker said: "The reality is that this is the worst possible conclusion that they could have reached as to what was the cause of the flash-crash....What they are saying to the investor is, look a so-so hedging order like this caused the market to go into an uncontrollable nose-dive.....What they are saying is, this was just one order from one mid-western mutual fund company. So what they are implying is, if you had had a flood of sell orders in the futures market, occurring within the same day even, you could be looking at stock market Armageddon."
ONE REASON STOCK MARKET VOLUME HAS DRIED UP
Brinker continued with his reply to Carl: "One of the reasons I think you've seen volume dry up, regardless of what the direction the market's doing, the volume has dried up relative to where it had been. Now I think the little guy is gone.....Many of them looked at the flash-crash and they said, that's it, I'm outta here - it's not a viable market.....Whatever is going on out there makes it very difficult for the small investor to deal with this."
WHY SMALL INVESTORS LEAVING STOCKS DOESN'T MATTER TO PRICES
Brinker continued: "The reason it hasn't mattered to the prices - and you've seen a really good trend here since early July in the market and we have a positive market so this year - the reason is because the institutions are trading the market all over the world. It's a global market - the US market. They don't care about this stuff - they just go about their business. But the small investor that gets up in the emotion of all this, oh they are gone......."
BRINKER'S CYCLICAL BULL MARKET TREND AND LATEST "ATTRACTIVE FOR PURCHASE" LEVEL
Brinker continued: "And it's a shame because they may wind up sitting out what looks like a really nice cyclical bull trend here. As you know, I believe we are in the second phase of a cyclical bull market with the correction low in early July when we upgraded the market to attractive for purchase done there in the 1030 S&P area. Now we are in the 1140's and I think investors are going to be very pleased with what they are going to be seeing. So it is unfortunate that an event like this would scare the little guy out of the market, but I suspect there has been some of that."
PRESIDENT GEORGE W. BUSH AND HANK PAULSON'S T.A.R.P. SUCCESSFUL
Caller John from Hartford said a lot of people in his congressional district are upset about TARP and he asked Brinker what he thought out it. Brinker said: "I think they are wrong. There's a lot of ignorance in politics....I think there is a lot of ignorance out there on what happened with TARP. Now the reality is, the latest estimate on the results of TARP are that the loss could be as much as $50 billion or it could wind up at a profit. It depends on how the sale of equity positions go in the future. And that includes the sale of the Citicorp equity position which is still close to half owned by the federal government......We know there was no humongous loss as a result of TARP.....Possibly all of it will be recovered with a profit. What it did was provide the banks with a capital cushion at a time when they couldn't get the money anywhere else. So I think it was a success, and I give President George W. Bush and Treasury Secretary, Henry Paulson, who are responsible for TARP - let's not muddy the water here - TARP was a product of George W. Bush and Henry Paulson. And I would say that they did the right thing with TARP......
........The only mistake that was made was Henry Paulson sold TARP to Congress on the false premise that he was going to use the money to buy toxic-assets, which never happened......Those who don't understand that the TARP program was a success are being unduly harsh on both President Bush and Henry Paulson - that's my opinion."
USE MENTAL STOP PRICE LEVEL FOR BOND FUNDS
Brinker repeated his advice that in case of sustained rising interest rates, those who don't want to ride the NAV down should set a mental stop price level below which you will not hold your bond funds.
FEDERAL INHERITANCE TAX LOTTERY
About big estate beneficiaries, Brinker said, "They just won the lottery, those people. Beneficiaries of those estates, won the lottery because of the dysfunctionality of the US Congress, which is at a level I never dreamed conceivable, there is no federal estate tax this year.....And it doesn't appear right now that that is going to change."
OBAMA HEALTH-CARE BILL AND THE LAW OF UNINTENDED CONSEQUENCES
After pointing that Congress has not passed a tax policy and there isn't much time left to act, except as a lame-duck, Brinker said: "This congress has done one thing - they have passed a health-care bill. And it's already had some effect and many of you have seen it. In fact, some of you have called about it - like skyrocketing insurance premiums. People around the country, many of them are seeing their health insurance premiums soaring because insurance companies are trying to position themselves for the changes that come in over a period of years. We see companies already that are announcing they're quitting the health-care insurance business in this line or that line.......
.......The latest example this week is the gigantic company in Des Moines Iowa - Principal Financial Group. They say that they are going to drop many of their health-care policies because of the changes in the health-care legislation. And this raises an interesting question as the companies run their insurance premiums up so that some can't afford them and other companies in the business just drop the health-care lines.....Is this the law of unintended consequences which we so frequently from legislation out of Washington?.......
.....Remember years ago the law of untended consequences reared it's ugly head after Congress passed a luxury tax on the purchase of yachts? Yachts costing more than $40,000 were going to be subject to a 10% luxury tax......Well there weren't many yachts being constructed after that because of the tax. And all off a sudden, we saw unemployment soar in that small sector of the economy.....But the point was, it hit hard where it did hit......"
OR WAS THE HEALTH-CARE BILL ABOUT INTENDED CONSEQUENCE ?
........Brinker continued: "I'm not sure that what we are already seeing as the fall-out on the health-care bill is an unintended consequence. Call me a cynic, which I am, but I think that perhaps it's an intended consequence. I think those that passed this bill knew that this would happen and they didn't want this bill anyway - we all knew that. They wanted single-payer.....Since they could not get single-payer, they didn't have the votes, they wanted a bill that was a stepping stone to single-payer - and I think that's what they got.......
.....I can just hear them now sitting around saying, well if we pass this bill, the first thing that will happen is insurance premiums will go through the roof - a lot of people won't be able to afford health insurance. And the next thing that will happen right away is a lot of insurance companies will say we're not going to write these policies because we can't make any money on them. Instead of the law of unintended consequences, that would make it the law of intended consequences....."
WHO WILL ACTUALLY PAY FOR HEALTH-CARE BILL POLICIES?
Brinker continued: "Of course, the new health-care law requires insurance companies to provide coverage to children with pre-existing conditions....It's effective now. Did you notice Principal Financial Group dropped that line too? You'll see more and more of this. You know this. Companies will simply leave the areas of coverage under the bill that they can't make money on. They're not going to take the inevitable losses on the policies. They'll drop the line.....
PLAYING OLD FILMS - COMPANIES WILL JUST BAIL OUT
Brinker continued: "We've already seen this film. You remember the hurricane situation in Florida got out of hand in 2005. They had storms criss-crossing the state like 18-wheelers. It was a disaster - cost the insurance companies a fortune. And what did they do? They pulled out......If you're along the coast, you know how hard it is to get a top-rated insurance company to write a policy against a hurricane these days - and other states too, up the coast........This is what happens - the companies just bail when the business model degrades......that's the way it works......
...... And it will be interesting to see the fall-out as this health-care bill gets phased in over a period of 8 years - all the way out to 2018.....Starting in January.....the pharmaceutical companies will be paying an annual government charge of 2 1/2 billion dollars. Now who do you think is going to pay that? You will pay it. It will simply flow through to your cost when you buy the drugs. And that fee will be up to $3 billion by 2014 - this is a back door tax. You slam the corporation and the corporation has no choice but to pass it on - and that is what'll happen.
HEALTH SAVINGS ACCOUNT GOVERNMENT TAKEOVER AND CHANGES
Brinker said: "They've also put in a provision starting in 2013 limiting how much you can contribute to your health-care savings account. It will be capped at $2,500. Right now the employer sets the limit - that'll change. They're also raising the deductible on medical expenses that year to 10% of adjusted gross income -- it's 7 1/2 now....."
HEALTH-CARE BILL MEDICARE TAX INCREASES
Brinker said: "Did you see the Medicare tax increases in this bill? It's 1.45 right now for both sides, the employer and the employee. It's going up to 2.35, that's 4.7 combined for the self-employed, compared to 2.9 combined right now on earnings over $200,000 for individuals - $250,000 for couples.....
.....And did you see the new 3.8% Medicare tax on unearned income? And did you see what is covered by this - capital gains, dividends, interest, rents, royalties. And if you make a taxable profit when you sell you home, you'll pay a 3.8% Medicare tax on the taxable portion of any profit from the sale of your home. This all starts in 27 months - January 2013. And these are just some of the provisions. So when you see the stuff coming out of Congress, you can appreciate the frustration of the voters."
Brinker's guest-speaker was Mark Zandi:
Moneytalk To Go is Available on Demand Totally Free at KGO810 radio for seven days after broadcast. Moneytalk has been canceled on all Saturdays. The Sunday program is archived in the 1-4pm time-slots. To download and listen later, right click on each hour that you want and use "Save Link as." KGO: Download Moneytalk Here Don't forget to save your copy of Brinker's guest-speaker in the 3-4pm hour!
SJ_Al took these while bike-riding around the Alviso Salt Ponds last week. This is a great picture of the old dirigible hangars at Moffett Field and Ames NASA Center: