Brief Summary, Commentary and Moneytalk Excerpts, February 16, 17, 2008
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TOTAL RETURN INVESTING Saturday, Bob Brinker’s opening monologue was devoted to what he labeled total return investing. He talked about the balanced approach to investing, which he explained as how much money you have in the stock market and how much you have in fixed income investing.
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Brinker said: “You have these three components of return that you are looking at in a balanced portfolio. You are looking at cash dividends on stocks or mutual funds of stocks. You are looking at the interest in the form of cash flow that creates……. and you are looking at capital appreciation over time that can also be converted into cash flow.” Brinker recommends a 4% retirement withdrawal rate.
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STOCK MARKET Brinker said that it was a good week for the stock market.
S&P 500 is at the 1350 level – up 18.7 for the week, a gain of 1.4%.
Dow gained 166 for the week at 12,348 – a gain of 1.36%.
Wilshire 5000 up 1.24%.
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ECONOMY: Brinker expects either no or very slow growth the first two quarters of 2008.
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BRINKER’S BEAR MARKET DEFINITION Brinker explained his definition of a bear market again today. He said: “That’s defined as a decline in the S&P Index on a closing basis in excess of 20%. Last time we had that was early in 2000 to March of 2003, where we saw the market go down almost 50% in the S&P Index……” (Honeybee sez: The market actually bottomed in October, 2002. Bob Brinker recommended returning all available cash reserves to the market in March, 2003. Those who followed his sell signals in January and August, 2000, would have raised 65% cash reserves. And those who then followed his advice to buy QQQQ with available cash reserves in October, 2000, and held them as he advised, would have invested up to 50% of those 65% cash reserves into them and watched as they lost over 70% of value.)
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BRINKER’S BALANCED PORTFOLIO A caller asked if there was much difference between a balanced mutual fund and a balance portfolio. After telling the caller that there should not be a whole lot of difference, Bob Brinker said: “The recommended balanced portfolio that I publish in my investment letter calls for a recommended allocation in a balanced portfolio essentially 50-50. Where you would have about half of the money in quality fixed income and half of the money in the equity market. So that’s the way I define a balance portfolio. We’ve also defined a balanced portfolio as having a range on the equity side that can go a little higher. You could have a balanced portfolio that could be 60-65% equities and the rest in fixed income.......In the investment letter, I use a 50-50 starting point. Obviously over time, that can vary, but I would say that on the upside, you would be unlikely to see it much above 60-65% equity and on the downside, you’d be unlikely to see it much below 50% equity........"
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BOND MARKET AND INFLATION A caller said that he had heard that mortgage rates are tied more to inflation than to overnight lending rates, and wondered if Bob Brinker would explain. Brinker said: “Interest rates are certainly tied to inflation and as one of the many interest rates out there, mortgage rates would be tied to inflation in this sense, investors demand a return on their money generally above and beyond the inflation rate. Now if you go to the academic community, they will show you evidence over the long term that investors in long-term maturities, such as most mortgages, want to have about a 3% real rate of return.......the long-term Treasury has been trading in the 4 ¼ -4 ½ vicinity.” .......If you subtract out inflation, there really is no real rate of return at all.” Headline inflation is running about 4% now. So the academic benchmark of 3% real rate of return does not always apply. Applied to the 10-year Treasury Bond, there would be no return left at all. “The bond market is saying loudly and clearly that it is not worried about inflation…….Bond market investors are not generally interested in taking long-term bond market risk unless they are going to get paid for it if they expect a lot of inflation – but they don’t.” We know that because we don’t see much of a inflation premium in the bond market. The base rate on TIPS is just over 1% -- exceptionally low.
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HIGH-YIELD PREFERREDS Brinker says that he has never recommended them on Moneytalk or Marketimer.
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NORTHERN ROCK The fifth largest mortgage lender in the United Kingdom is being Nationalized as a result of the sub-prime mortgage collapse. Trading has been suspended. This is the first time since 1984 that the British Government has taken control of a bank. Brinker mentioned several U.S. Federal interventions/ bailouts that he considered successful and the right thing to do. Lockheed in the 1970s, Chrysler in 1979, New York City in 1914 and in 1975.
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PROJECT LIFELINE It's a proposal out of Washington DC to suspend mortgage foreclosure process for 30 days. Brinker says they are just trying to buy some time -- the lenders don’t want to take possession of properties.
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BIZARRE PRESIDENTIAL POLITICS Hillary Clinton wants a 90 day freeze on foreclosures and a 5-year freeze on interest rates. Brinker calls the idea “…..one of the most bizarre proposals in the history of presidential politics…..What is Hilary smoking? I don’t have an answer for you, but it’s definitely not good for your clear thinking – there’s no doubt about that, because a 5-year freeze on interest rates is one of the most bizarre economic theories for all time – credit Hilary Clinton for that one. It was her idea – fortunately no one else is picking up on that one.”
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GNMAS RISK FACTOR GNMAs are very high quality investments with a direct guarantee from the government for repayment of principle and interest. GNMAs generally fluctuate inversely to interest rate trends and the NAV changes. Vanguard GNMA fund is now very close to the top end of that normal fluctuation range. The yield on VFIIX is 5.1% at this time.
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LADDERED CDS Brinker said that those who do not want to accept GNMA NAV fluctuations can just put together a ladder of FDIC insured CDs, hold until maturity and roll them over when they come due.
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COVERDELL SAVING FOR COLLEGE: For information Brinker recommended this website: http://www.savingforcollege.com/
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STIMULUS PACKAGE When will the checks arrive? The earliest published time that Brinker has seen is May.
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GMAC BONDS RISK High risk to very high risk category.
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LONG-TERM CAPITAL GAINS IN 2008 A caller pointed out the fact that if you are in the 15% tax bracket in 2008, you don't pay any capital gains. He asked Brinker if he was aware of this. Brinker said he was aware of it for 2008, but he said that he is not sure it will last beyond that time, “…….because I expect tax increases if we get a democrat in the White House next January, and your guess is as good as mine as to how far they will reach into the pockets of taxpayers. There is no question they are going to increase taxes in 2009…….it doesn’t matter what the name of the democrat is…….Barrack Obama, Hillary Clinton have stated publicly they plan to raise taxes – we don’t know what form that will take.” Brinker explained that he is distrustful of candidate promises about tax changes because Bill Clinton promised a middle-class tax cut (which probably got him elected in 1992) but then he actually raised taxes on the middle-class after he was sworn into office. (Don't forget to check to see if your state goes along with the 2008 capital gains tax break.)
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HOME PRICES Brinker called them “kinda sorry.” The median sales price for a U.S. home was down almost 6% YOY, to $206,200 by the end of 2007 -- that’s nominal, when you add in inflation, it’s about 10% real terms. The largest in almost 30 years. About half of the metropolitan area saw prices decline. There were 16 areas where the nominal decline was more than 10% -- 14% inflation adjusted.
Regional declines: West nominal 8.7, inflation-adjusted close to 13%; Midwest decline 3.2, inflation-adjusted about 7%;
Biggest declines: Lansing and East Lansing, Michigan, down 19%, inflation-adjusted, 23%; Sacramento, California, down 18½, inflation-adjusted, 22%; Riverside and San Bernadino, California –the so-called “inland empire,” down 17% inflation-adjusted, 21%.
Markets Who Bucked the Trend: There were 11 that went up 10% or more. Cumberland, Maryland up 19%, inflation-adjusted, 15%; Yakima, Washington, up 18%; Atlantic City, N.J. up 11%.
Median Prices Extremely Variable: Youngstown, Ohio -- $72,600; Silicon Valley, California -- $845,000 (Twelve times higher).
Declines in Sales: Nevada, Arizona, Wyoming, Oregon, Utah have had big declines in sales volume, which can feed into prices.
CASINOS “…….somebody coming in and throwing thousands down the drain……”
