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STOCK MARKET Bob Brinker began his opening monologue by stating where the market stands in relation to its all time closing highs. The S&P closed at 1330.63 which is 15% below its all-time record closing high. The Dow is at 12,266, which is 13% below its all-time record closing high of about 14,000.
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Honeybee EC: Brinker didn’t mention the Nasdaq. It is at 2271.48. Brinker has an open trade from October 2000 in QQQQ (bought at $83). QQQQ is now about $43 -- seven years later. This trade was not accounted for in his model portfolios.
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He issued a new buy (March 2003) in the low $20 range after the Nasdaq dropped about 70%, and as of now his Porfolio One still recommends 15% in QQQ via a Rydex Fund.
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Here are the latest Nasdaq statistics:
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NASDAQ Chart (Using Intraday prices): http://home.netcom.com/~kirklindstrom/Charts/NASDAQ.html
Last Market High 10/31/07 at 2,861.51
Last Market Low 01/23/08 at 2,202.54
Current NASDAQ Price 2,269.88
Decline in Pts 591.63
Decline in % 20.7%
Max Decline 23.0%
This means the correction from high to low has been 23.0% and we are currently 20.7% off the peak.
The decline off the high on a closing basis has been 20.3%
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INTEREST RATES “…are very low…” 10-year Treasury notes at 3 1/2%; 30-year bonds at 4.4%; and the shortest of all, Fed Funds at 3%. Fed Funds target rate is set by the Federal Open Market Committee. “Conventional wisdom” says “rates are going down” at the next FOMC meeting on March 18th. The question is how much -- Brinker says a minimum of 25-50 basis points.
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FOMC Brinker said: “I think that the Fed members were caught up in an ivory tower with the doors locked for awhile, and they certainly have come down from the ivory tower now. But for a long, long time, I think they were holding rates artificially high. Given what was going on in the credit markets even as early as last summer."
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Brinker completed his monologue by talking at length about Warren Buffet -- whom Brinker said is a “national treasure.” He said that Buffet had issued his annual letter and discussed some points with which he agreed. Firstly, that the housing market had been operating under the false premise that housing prices go up every year, which simply isn’t true. Buffet’s letter also said that some companies make excessively high return-rate assumptions on their pension investments. Buffet likened this to the queen in Alice in Wonderland, who said: “Why sometimes I’ve believed as many as six impossible things before breakfast.” Another point that Buffett made which Brinker agreed with is that the taxpayers will end up having to pay for those fat labor union pension plans. And when the money comes due, the politicians who agreed with the labor union's fat pension plans will be “on a beach with a mint julep.”
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Bob Brinker said: “When you see these politicians running for president out there, promising the world – I’m going to give you a college education – I’m going to give you universal health care – I’m going to give you a $2500 cut in your insurance costs – I’m going to give you $5000 for every baby born, the day they’re born – by the way, the list goes on and on and on, especially from these two Democrat candidates. I’ve listened to the speeches. And I’ve tallied up the money. It’s hundreds of billions a year. Don’t ask where it’s coming from. That can’t be asked because there is no answer. But you see these politicians are smart. They know if they get elected on these promises, they don’t have to deliver. They already won, once they won the election. Just like William Jefferson Clinton on inauguration day in 1993 – you remember. He got elected on a middle-class tax cut, got sworn into the office and said I just checked the numbers, about that tax cut, not gonna happen, but I do have some news for you, we’re going to raise your taxed. Thank you very much, Bill….I’m Bob Brinker, this is Moneytalk” (Honeybee sez: who can argue with any of that?) 8^)
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One of Brinker’s main topic of the weekend seemed to be our lack of energy independence. He is pro-nuclear and pro-drilling in Alaska. (Honeybee sez: I agree with Brinker 100% on this subject.)
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BOND FUNDS Brinker recommends high quality instruments only (on Moneytalk), such as Treasuries and Vanguard GNMA Fund, TIPS.
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PROPOSED FREEZE ON INTEREST RATES Hilary Clinton’s proposal for a three month moratorium on mortgage payments is not long enough. A five-year freeze on adjustable mortgage rates is more significant, but mostly significant for the people who own the paper.
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Brinker said: “The people that own that paper, right, they have it on a certain contract, right? So you are talking about moving the goal post, changing the rules of the game and changing the terms of the contract – I don’t even know how that would happen, by the way. But if you were to change the terms of the contract, if everybody agreed, then here’s what that would do – let’s presume this is on some sort of an adjustable rate mortgage. That would move the interest rate risk from the borrower to the lender…..so that could cause problems if interest rates in the future go up, that could cause problems for the lender because they are holding the paper and they are not collecting the rate they expected.”
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INFLATION It comes down to a variety of factors – money supply is a factor in hyper-inflation. But that isn’t the situation right now, although it has been in the past like in the late 1970’s when there was “too much money chasing too few goods.” Brinker said: “If you are talking about headline inflation as measured by the Personal Consumption Expenditure Index, year over year, that’s 3.7%. That’s the latest updated number. If you are talking about core inflation, you’re talking about 2.2%. That’s again, year over year on the Personal Consumption Expenditure Index. And again, that’s the key index used by the Federal Reserve when measuring inflation trends. So you have 3.7 headline; you have 2.2 core.
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And you also have a situation where two components of inflation, which are oil and transportation, have been driven up by the increase in the price of oil and that spills right into transportation – to a lesser extent than oil, but still spills into transportation. And so, when you are looking at the headline number, that’s including a tremendous run-up – close to 20% year over year run-up in the cost of oil. And that’s one of the reasons that the headline number is 3.7, but the core number is only 2.2.
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Because the fact is, there’s been very, very little seepage of headline inflation into the core index and that’s the reason it’s 2.2. But 3.7 is a higher headline number than we’d like to see, but the reality is within the headline number, you have your oil, you have your transportation. And you have something else going on now which is a relatively new development, which is what’s going on with the cost of food. And one of the reasons the cost of food is going up – and it’s up 4.9% year over year, by the way, which is one of the larger numbers we’ve seen in a while on food. That’s going up for a variety of reasons, including the fact that we’re now imposing on the food chain to make things like ethanol. So the bottom line in all of this is that it all contributes to headline inflation.
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Medical care also has been a problem, that’s up 4.9 year over year…….but when you take out food and energy, you’re down to 2.2 on the core."
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BOND MARKET and INFLATION Brinker says the bond market is an indicator for inflation.
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REBATE ELIGIBILITY Those who don’t regularly file tax returns will need to file a return to get a rebate check, even those on Social Security who have no other income. All you need is $3000 in SS income to be eligible. Expect checks to be mailed in May.
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CRITICAL MASS DEFINITION “The amount of money you need so you don’t have to work.”
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RUN-AWAY SPENDING Over the past 8 years, congress has been “irresponsible.”
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U.S. DOLLAR Lower interest rates make the dollar less attractive to foreign investors because they get less yield in dollar-based investments like Treasuries. The dollar is at a all time low against the Euro. The Euro is at about $1.52. The Euro first started trading in 1999, beginning at $1.17, and then dropped to .823. The effects of the falling dollar would be very important to anyone who wanted to move to Europe and needed to convert to Euros. The dollar is at a three year low against the Japanese yen.
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ECONOMY “….flat on its back….in the first half of this year we may not see any growth at all. Whether it will be negative and by how much, remains to be seen, but certainly this quarter can be negative –wouldn’t surprise anybody, I don’t think.” Weak economy is the reason that we’ve been able to hold down inflation.
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MUNI BOND MARKET Some funds are at 52-week lows and are under a lot of pressure because of some hedge fund forced selling -- the credit markets are in “disarray”. There is a supply/demand imbalance. Brinker said if you hold high quality bonds, especially individual issues, he would NOT recommend selling. MOF: Brinker said he believes the smart money right now is on the buy side, taking advantage of the forced liquidations (“fire sale”) to cover margin calls coming out of the hedge funds.
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Brinker’s Saturday guest speaker was Larry Swedroe. Larry’s latest book is “Wise Investing Made Simple.”
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Honeybee EC: Larry has his own opinions and is not afraid to say them to Bob Brinker. Whether or not Larry is fully aware that Brinker actually sells his ability to time the market is not known, but in either case, it sure sounds like Larry does not believe it can be done.
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(In EDIT: I found this post by Larry Swedroe. It answers the question as to whether or not Larry knows about Brinker market-timing views. ) In order to be fair to Brinker and Larry, here is a copy of Larry Swedroes' post from another site:
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larryswedroe Joined: 22 Feb 2007 Posts: 2345 Location: St Louis MO.
Posted: Mon Mar 03, 2008 8:53 am Post subject:
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For the record, I am well aware of Brinker's views on market timing. Give the guy credit for having me on knowing my views on that.
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Bob Brinker began the interview with Swedroe by asking him what he thought about the effect of negative campaigning by the presidential candidates on the stock market.
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Larry Swedroe said: “It’s very difficult for people to deal with the emotions that are caused by bear markets and all the bad news – they tend to panic and sell –and that’s why they end up with lousy returns. You know, one of my favorite sayings, Bob, is that bear markets are the mechanism by which money is transferred from those with weak stomachs and no plans to those with strong stomachs and a well thought out plan, so that strong stomach gives them the discipline to stay with that plan.
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We’ve got all this bad news, but I could tell you for example in 2003, if you had a perfectly clear crystal ball to all the horrible things that were going to happen that year, you, me and everybody would have been short stocks. We had that SARS virus. We had the Iraq invasion and it’s 5 years later, we’re still there. We had mutual fund scandals that were destroying confidence, and I could go on and on with that list, including global deflation threat from outsourcing, etc. And yet, stocks had maybe the stocks had maybe the greatest year ever – with many asset classes up 30, 40, 50, and even 60 and 70% for some of the international ones. Stocks, there’s an old saying, will often climb a wall of worry. Because you have to remember stock are forward looking. The already include all the bad information that we could possibly know about the market. And therefore, it’s too late for you to do anything about the bad news.
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I’ll add one last thing which is really incredible, I think will shock most people. If you could perfectly time recession so your crystal ball allowed you to get out of the market before a recession and get back in the day after it ended, there have been 11 recessions in the post-war era. The stock market has actually gone up an average of 7% during those recessions and that would have out-performed riskless Treasury Bills, say a short-term parking place while you waited for the recession to end -- so very, very difficult to try to out-fox the market.”
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Bob Brinker replied to Larry: “Of course at this point Larry, as you well know, we have not had a bear market. As we speak the S&P is 15% under its closing high, and it’s been as much as 16% on January 10th, so right, we are solidly in correction territory. My question to you would be, how could it be that with all of the bad news that we have had –and I’ll tell you what we have had an avalanche of bad news out there, including the credit markets in just complete disarray in some areas – with all of the bad news that’s been out there, and all of the recession verbiage that’s out there, how could the market just be down in a correction of 15% -- that’s not a big deal?"
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Larry Swedroe said: “Yeah, well ahh, you know, I think that’s the great mystery. If any of us knew the answer to that question, we’d all be a lot richer than we are. Nobody has shown, really, any great ability to forecast the stock market. For example, a lot of people point to hedge funds. Well the academic research on them – those geniuses – is that they have had a hard time, for their returns, to keep up with Treasury Bill returns once you account for the risks that they take and all the biases in the data. There is just so many unexpected events it’s impossible for anybody really to guess really where the market’s going and therefore, I think the most prudent strategy for investors is to have a well-thought out plan, that most-importantly anticipates bad markets just like this. Even worse ones, we’ve had two down 50% markets from 73 to 4 and 2000 to 2002……..”
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Swedroe went on to say that investors still in the accumulation phase should root for bear markets because if you have the discipline to stay the course, you can buy cheap. It’s only in the withdrawal phase that bear markets are painful – unless you panic and sell, and your plans end up in the trash heap.
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Brinker replied: “Of course, that is one thing that we do find, we find that individual investors do so much worse than an index fund, and one of the reasons is they do exactly what you just talked about – you know when they look at these 49-50% declines, like we had early this decade, they do sell out.”
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Swedroe said: “What investors do, the way I describe it is they are concave investors. If you think of it an upside down “v” the left side of it, they watch yesterday’s winners and then buy high – as if you can buy yesterday’s returns when you can only buy tomorrow -- and then you go down the right side of that upside down “v” you watch yesterday’s loser and panic and sell. The key to successful investing is to become a concave investor, like the “v”.....The left side, you watch yesterdays losers and buy low, not because you are predicting they are going to turn around. You are just going restore your asset-allocation to its plan. And then on the right side, you watch yesterday’s winners and you sell high, again to rebalance your portfolio. “
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RUN AWAY OIL PRICES Swedroe said that he is not an expert on the oil markets, but the issue is how it affects portfolios. He thinks a good way to hedge these kinds of risks is to own a small allocation to commodities. He recommended Pimco Commodity Real Return Fund. He views it as portfolio insurance that does best when either the stock or bond market is doing poorly. “For example, in the 8 bear markets, or 8 years of negative stock returns since 1970, commodities have returned an average of plus 23%. And in the 9 years of negative bond returns, commodities have returned, believe it or not, 30% a year.” Commodities are positively correlated to inflation and stocks and bonds are negatively correlated. Larry recommends 5-10% of equity allocation in commodities.
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Swedroe does not recommend preferred stocks, junk bonds or convertible bonds. He recommends taking all your risk in equities, and no risk in the fixed income portion of you portfolio.
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Brinker asked Larry what kind of a grade he would give to “the rookie” Ben Bernanke, who is running the Federal Reserve right now.
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Larry opined that Benanke has an incredibly tough job, then said: “Bernanke’s in a real jam right now. He’s faced with rising inflation, a collapsing dollar and at the same time a real credit crisis. I don’t think he has any choice but to ease interest rates because we have a liquidity crisis now and that’s the job of the Fed to be the lender of last resort.” Larry went on to explain that if inflation keeps going up, Bernanke will be faced with the dilemma of having to raise interest rates at some point. “He’s in a bind that unfortunately was not of his making. I think he’s done a pretty good job basically.”
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Bob Brinker immediately changed the subject and began talking about the Keynesian economics and bi-partisan cooperation of the stimulus package, then asked Larry what was his “reaction” to it.
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Larry said: “Well, I think it’s a very bad package. (Honeybee sez: Oops! LOL) There’s nothing long term. People are not going to react to this in the way people expect. That’s what the historical evidence on similar packages. If you want to stimulate the economy, the best way to do that is to give an immediate write-off to corporations on investments that they would make……" (Brinker interrupts and says that is included in the package.)
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Larry continues: “It’s a tiny amount, they could do more. And a better way to do it would we to cut the corporate tax rate significantly here, which would create more jobs in the U.S. rather pushing them overseas. I’m not a big fan of this package. They probably would have been better off doing nothing in my opinion. I think the stock market might have taken it better."
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Brinker said: “So even though they are trying to do something to be helpful to the economy, you don’t like it?”
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Larry said: “I don’t like this particular one……….it’s spending oriented instead of incentive oriented. And being a free market economist, I think they ought to rely on the market to do the job, not spending by the government. They’ll spend it in the wrong ways here…..I think you want to create incentives for growth. That will stimulate the economy and actually end probably increasing revenues, rather than creating a bigger deficit which is all they’ve done here, I think. Most people will get the $300 and it will be put in their pockets. It’s not going to get spent, cause people spend, all the evidence shows, on long-term expected income, not based on another $300 check. I think this is a mistake."
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Brinker made no further comments on the subject and immediately went to commercial.
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Honeybee sez: Brinker seldom argues with his guests and almost never tells them when he disagrees with them, so I will present his opinions on the stimulus package. They are diametrically opposite Larry Swedroes’ opinions:
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Brinker has stated frequently that he thinks the stimulus package is good thing and in January, he even hinted that they may have gotten the idea from Moneytalk. Brinker said: "So I think it’s a good package. I think it’s an extraordinary example – and it’s a piece, none of these things are meant to be deliverance from economic problems, it’s a piece of the puzzle, but I think it’s a good one. And I think the most remarkable thing to me – in fact this is exactly what we recommended on the first weekend of January right here on Moneytalk that they get a stimulus package out there. We talked a lot about it just three weekends ago right here. Congratulations to them, where they’ve come this far."
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Brinker’s Sunday guest-speaker was Scott Bittle. "Where Does the Money Go?: Your Guided Tour to the Federal Budget Crisis by Scott Bittle and Jean Johnson.
In Edit: Please see "comments" for a Larry Swedroe excerpt correction.
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