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Sunday, February 20, 2011

February 20, 2011, Bob Brinker's Moneytalk: Summary, Excerpts and Commentary

February 20, 2011....Bob Brinker hosted Moneytalk today.

The following Bob Brinker comments summarized, paraphrased or excerpted:

STOCK MARKET: Brinker reported that the Dow and S&P 500 index closed above June, 2008 levels -- so far this year, up 7%. The Nasdaq is almost back to ten-year high. Brinker gave no hint of any change in his bullish outlook.

"If you look back at that period back in the mid-1990's, the market kinda yawned. So I don't see any expectation that this would be a dramatic event in terms of a stock market issue."

INFLATION: Brinker recited the weekly "Treasury implied inflation rates" but there were no calls about inflation in the real world this week. The ten year Treasury implied inflation rate is 2.4%.

....are historically low:
Three-month Treasury Bill = annual yield of 0.1%.
Six-month Treasury Bill = annual yield of 0.125%.
One-year Treasury = annual yield of 0.25%.
Two-year Treasury Note is yielding 0.75%.
Five-year Note is yielding 2.25%.
Ten-year Note is yielding 3.6%.
Thirty-year Bond is yielding 4.7%.
REAL ESTATE-HOUSING MARKET: Brinker said that there have been some signs of stabilization, but it is going to take time to work through all the short sales, foreclosures and inventory.

"at 9%"

BANKS: Brinker said: "I still think there are a few banks that currently are in the too big to fail category.....This is just an opinion, it could be right, it could be wrong. I think that Citigroup, Bank of America, J.P. Morgan and Wells Fargo. I think those four banks would be in the category....of too big to fail."

....Many of the states are running gigantic deficits which creates a problem when you don't have the keys to the printing press. No state has a printing press, so they have to have to come up with "smoke and mirrors" which is one of the "leading ways they do things in Sacramento, California." Or they have to come up with changes. The changes could be reduction in benefits -- or tax increases. It looks like tax increases are becoming increasingly popular at the state level.....

.The State of Minnesota has proposed a new all-time-high 13.95% marginal tax rate on incomes over $500,000, and a 10.95% for single filers earning above $80,000 taxable income. Brinker opined that since neighboring South Dakota has a zero state income tax many high-earners may be leaving Minnesota and moving across the border to South Dakota.

"Right out of Ripley's Believe it or Not this week, the White House projected that the federal deficit for this fiscal year through September would be 1.65 trillion dollars. That is the biggest deficit in the history of the United States for any one year."

NATIONAL DEBT ....Brinker continued:
"So the national debt just continues to spiral out of control. It's already gone through 14 trillion dollars. It's getting very close to the $14.3 trillion number that triggers the need to increase the national debt ceiling. In fact, the Treasury Department now says that interest expense is going to rise to 3.1% of Gross Domestic Product within 5 years. Last year, it was 1.3%, given the low rates.....And they also predict cumulative deficits of over $4 trillion through 2015.....It's starting to look like we could be looking at a 20 trillion dollar national debt in considerably less than ten year."

INTEREST ON NATIONAL DEBT.....Brinker continued:
"And the Treasury Department estimating that net interest expense is going to triple in four years to an all-time-high of $554 billion. This is just for interest. Last year with the low rates, it was 185 billion dollars......The politicians in Washington are spending like a runaway freight train. In turn, they are running up the national debt to levels that are truly incomprehensible in such a short period and that in turn is going to run up the cost of serving the debt."

"And to make matters worse, they have been trading down the average maturity of the national debt.....They have reduced the effective maturity of the US national debt to about 3 1/4 years.....That means that in an average of 3 1/4 years, the Treasury has to roll over the entire portfolio on an average basis. Now you know, we are talking about a lot of debt here. It's about 9 trillion dollars right now if you look at the marketable government debt outstanding right now...... And by the way, it's up like $3 trillion plus in the past 26 months. It's up like $3.15 trillion in the past 26 months......Now that means if we get into normalization of interest, that's going to increase the interest of that national debt......So all in all, it is truly an amazing situation."

CUTTING BUDGET DEFICIT: Brinker said: "These numbers they're kicking around in Washington. Possibly cutting $61 billion from the budget deficit. Now wait a minute. What about the other 96% of the deficit? It's astounding to me that the people that have been sent to Washington to change all of this in the last election are talking about such tiny amounts.....They are going to have to make decisions on entitlements and military to get anything meaningful done.....Forty percent of the federal budget in in entitlements, Medicare, Medicaid, Social Security.....They have to go after those if they are going to cut spending."

* Caller Gary from Virginia said he was a Marketimer subscriber and was primarily invested in portfolio 1, but had reached the point where he needed more fixed income and wanted to know if Brinker thought it would be a good idea to simply begin using the fixed income allocation from portfolio 3 rather than selling off everything and starting over.

Brinker replied:
"That is a great question and my answer is the same as it's always been. That is this, that model portfolio 1 and model portfolio 2 are both all equity portfolios. Therefore, they apply to the equity portion of an investor's portfolio. That is also true of the active/passive portfolio that you see each month on page 7 of the investment letter. Now model 3 of course, that is a portfolio is designed as a balanced portfolio so it includes a combination of stock market and income investing......But if you want to take model 1 or model 2 or the active-passive and use those for the equity portion of your portfolio......The if you wanted to have a fixed income portion, you could take that fixed income portion in model 3 and you could also take the income, which is the dividend related income portion and you could plug that in as well."

Honey EC: Brinker's active-passive portfolio is simply is the kind of portfolio that most advisors recommend for those who don't want to be bothered with making changes, but want wide diversity in a simple form with low expenses and high level of tax efficiency.

Brinker's active-passive portfolio has been fully invested for over 8 years. It has an 80% weighting in Vanguard Total Stock Market Index (VTSMX), 10% in Vanguard International Growth (VWIGX), and 10% in Vanguard All-World ex-U.S. (VFWIX). (Brinker recommends VTI as a substitute for the Vanguard Total Stock Market Index Fund for those who want to use an ETF.)

Vanguard Ginnie Mae Fund (VFIIX).

* Caller Josephine from South Carolina asked about Vanguard Ginnie Mae Fund (VFIIX). Brinker told Josephine that her weightings were beyond the amount he recommended in his investment letter, then he found out her holdings were only 20%. He breathed a sigh of relief and said that was okay. (He later told Joe that the fund had done "incredibly well.")

Honey EC: In January, Brinker lowered the Ginnie Mae holding in portfolio 3 down from 40% to 25%.

Vanguard Wellesley Income Fund (VWINX)

Josephine followed up by asking Brinker if the Vanguard Wellesley Income Fund (VWINX) was going to be "in the fixed part of his portfolio" or was it going to be "in the equity part of his portfolio."

Brinker replied: "That's a hybrid. We're using that as a hybrid. So the answer to your question is yes and yes. It is an income related security..... And that fund has done a great job in a conservative realm. That is a fund that is 62% in fixed income securities, and 38% in income-related securities, such as dividend paying stocks. So that makes it a hybrid........Personally, and I've said this before in the past, I think it's a well-managed fund."

Honey EC: Maybe someone else remembers Brinker mentioning Wellesley Fund before today, I do not. However, Josephine's question is a good one, but Brinker artfully dodged and did not answer.

In my opinion, Brinker spun like a top to avoid admitting that in January, 2011, he added this fund, which is 38% stock, to his fixed income portfolio, and to model portfolio III which is already heavily over-weighted in stock.

Why does Brinker have a fixed income portfolio with stock in it? Does calling Wellesley a "hybrid" fund somehow make it appear less strange to have equities in a fixed income portfolio? Or does the rose by another name maybe not smell the same, and is it still a rose? (Sorry, mixed metaphors again. LOL!) As far as Vanguard Wellesley Income Fund (VWINX) holding dividend paying stocks, that is true, but the fact remains, they are stock.

Caller Jim in San Diego, one of several callers who claimed that thanks to Bob, he was in the "Land of Critical Mass" said he was "stopped and shaken out" of some of his individual stocks because of fear. He wanted to know how to handle fear and greed.

Brinker replied:
"One of the ways you handle that is by managing specific stock risk by limiting yourself to no more than 4% of equities in any one company stock. I think the best way to handle it is to take a step back and take a macro-view of what you're doing. And what I'm talking about here, and you can use stock equivalents exchange-traded funds.....Things like the S&P 500 Exchange-Traded Fund, the Spyders....where you would be investing in the S&P 500 instead of the XYZ company. You would be throwing away that specific stock risk that you've been dealing with and you would substitute for it a market risk.....And you might find that you are more comfortable diversified across hundreds of companies."

Jim followed up
by telling Brinker that he had tried XLE (energy spyder), but was still inclined to sell when, for instance, he heard of problems in the mid-east.

Brinker replied:
"Let me share with you something I've done personally and I've also recommended in my investment letter.. And that is turning a potential negative into a positive, literally. And that is to invest in oil stock that is in a politically safe region. And the region that I've chosen, I consider to be the most politically safe regions in the world, which is Canada. And Canada is the largest exporter of oil to the United States in the world.....

.....The reality in the mid-east has been very, very ugly, very unstable......I would agree with anybody that calls the mid-east a giant tinderbox......Aside from the fact that about 3% of the world's daily oil supply floats through the Suez Canal.....a substantial portion of the world's oil supply comes out of Saudi Arabia....So when you consider the potential risk to the world's oil supply......and when you oil that you can identify, long sources of oil supply and decades of proven political stable reasons.....And again, I mention Canada as one of my favorites, the negative becomes a positive."

Honey EC:
I was expecting Brinker to talk about his Canadian oil company "off-the-books" stock recommendation today because last week the NAV rose from $40.82 to $44.90. Brinker added Suncor (SU) to his individual stock list back in May, 2009. I purchased some of it a couple of weeks ago and have a watermelon smile on my face. :)

Funniest call of the day was from Joe from Ohio, who said:
"May I thank you for all your years of service. I've been listening to you for over 20 years. And my sister's daughter just got married and she wants to thank you for the beautiful wedding reception she was able to provide for her daughter because of your advice......And my brother would like to thank you for his retirement home in Florida....(on your advice) He went into Ginnie Maes and he now has a beautiful retirement home in Florida." [Honey EC: You can't make this stuff up, noone would believe you. LOL!!]

*Caller Michael from Kansas City,
who said he had been listening to Moneytalk for ten years and also loved his subscribtion to Moneytalk on Demand. Too bad Michael doesn't know he could download Moneytalk for free from KGO810.

Moneytalk is FREE and Available on Demand at KGO810 radio for seven days after broadcast. The program is archived in the 1-4pm time-slots. Be sure to download the Greg Farrell interview in the 3-4pm time slot: KGO: Moneytalk, it's Downloadable

Brinker's guest-speaker was Greg Farrell:

The National Debt:

Another masterpiece of photography by our friend, Dixiegeezer. Click to enlarge:


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