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Monday, July 27, 2009

Bob Brinker Moneytalk Summary - Interpretation of what Brinker Said on July 25 & 26, 2009

This weekend Bob Brinker says "clearly we are in a cyclical bull market. " Here is David Korns "interpretation" of the July 25 and 26, 2009 Moneytalk (Bob Brinker Host) shows. You can read more about David Korn at the end of this article.

STOCK MARKET FORECAST

Brinker Comment: Bob observed how well the stock market is doing and told listeners that in January he had forecast that the market would make significant gains in 2009. Bob said a lot of people were talking about Armageddon at the time, predicting a collapse in the financial system. Bob pointed out that being in cash this year was the worst place to have any stock market money with returns close to zero and missing out on the opportunity costs in the gains this year. The only worse place to be would have been if you were short the market. Bob said his forecast in January was a “voice in the wilderness” and that so often the best place to be is a voice in the wilderness because that is the way the stock market works quite frequently. It is a forward looking mechanism, not a rear-view mirror reactor. The key to success in 2009 has been to look forward, to be discounting future developments and the way to do that has been with a fully invested stock market portfolio.

David Korn: Ahem. Let me first congratulate Bob for making a prediction in January of this year that the stock market would produce significant gains. Well done buddy. Now let me remind Bob that immediately following his forecast, the stock market declined around 25%, blowing past Bob’s revised lower buy points. Then along came March, when he finally capitulated on no longer issuing “buy recommendations” and then the market began its bull market run on March 9, 2009. Bob’s “voice in the wilderness” remarks run completely shallow in my opinion, because he was belittling the bears throughout the first quarter of 2008 as the market began the ravages of worst bear market in 70 years. His forecast for significant gains in 2009, was simply one of many bullish calls Bob has made over the last 2 years. He missed the bottom on March 9th completely (see my March 9, 2009 special alert which discussed the positive divergences). Think I am too hard on daBrink? If he wasn’t such a spinner, I wouldn’t have to set him straight.

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CYCLICAL BULL MARKET

Caller: A caller noted that trading volume had been low and wondered how we could be in a bull market without higher volume. Bob said a lot of traders are scratching their heads wondering how this can be. But clearly we are in a cyclical bull market. Bob noted that in the summer, volume tends to wane because many people are on vacation and so there isn’t as much active trading. The other thing impacting volume is that there are a lot of people who became disenchanted with the market and are no longer participating in stocks.

David Korn: I have maintained that a bull market began on March 9th. I thought Bob had been setting the stage for calling this a cyclical bull market, but I think he was waiting to make sure that it was going to be clear that we wouldn’t have a retest of those lows. With the market now up around 35%, he can comfortably make that statement. The important question now becomes when will this bull market end. They all do. And when they end, that means it is because a bear market has begun.

EARNINGS

Brinker Comment: There has been a melt-up in stock market prices over the last couple of weeks with very little going on other than buying. The market has produced about 11-12% gains over the last 10 trading sessions. People are obviously anticipating a better economy down the road but this has also been accompanied by way better-than-expected corporate earnings. The Wall Street forecasters were way low on their corporate earnings outlook, with earnings coming in better than a 2-to-1 margin during this reporting period.

David Korn: Good chart focusing on 12-month as reported S&P 500 earnings here:

MARKET REWARDING INVESTORS

Brinker Comment: For investors who are in the stock market (up to their own personal risk tolerance), the market is rewarding their ownership of stocks. We are just past the halfway mark of this year, and we have already seen a total return of over 11.5%. When you consider that people earning cash in money markets that yield less than 1%, the returns are extraordinary.

David Korn: Indeed. The low rates on money market funds (and other cash equivalents) is also helping the stock market as investors look to eek out gains, whether by stock market appreciation or good old fashioned dividends. You remember those right? I just looked up the dividend yield on the S&P 500, and even that is yielding 2.62% for the 12-month period ending June. When you consider that even the Vanguard Prime Money Market Fund is yielding less than a quarter of 1%, that’s pretty significant.

SUCKER’S RALLY?

Caller: A caller said he heard someone on TV call the recent market action a “sucker’s rally.” The caller said he had lost so much money in the stock market like everyone else, and asked Bob his opinion. Bob said if you are going to call double-digit returns year-to-date as a sucker’s rally, then who are the suckers? Are they the people in the market making these returns? The caller said if it takes another big drop the people who are in the market, they will be the suckers if the market goes back down and said he hoped Bob would be able to get him out if that happens. Bob said he went out on a limb in January to make the prediction that the stock market would have a significant up year. Bob noted that back in January, he said the market was very attractive for purchase when the S&P 500 was in the low-to-mid 800s and look where it is now, up around 980. For people who are in cash, the market will have to take a big decline just to get back in at much lower levels.

David Korn: Bob didn’t address the caller’s question about whether he would be able to “get him out” before the bull ended. When you think about it, Bob has only issued one “sell” signal in over 20 years. Much harder than a buy signal to do.

David Korn#2: Bob’s buy signal of low-to-mid 800s is working out now. The buy signals from 1400 down to the low-to-mid 800s haven’t worked out so well.

David Korn #3: Bob took a bunch of jabs at advisors who were recommending cash. He might have been referring to the advisors who avoid the stock market during the May-November timeframe under the “Best Six Month’s” or “Seasons in the Sun” strategy. They did great in 2008 by being out of the market during that time frame. It remains to be seen whether that strategy works out this year. I’ll let you know around November 1st.

INFLATION

Brinker Comment: The implied inflation rate in the Treasury market suggests that investors are saying there is a 1.9% implied rate of inflation. Right now, the Consumer Price Index is showing deflation on a year-over-year basis of 1.4%. With the implied rate of inflation in the Treasury market at 1.9%, that means you would need to see inflation increase by 3.3% for the implied rate to be realized.

David Korn: Federal Reserve Bank of Philadelphia President Charles Plosser gave an interview this week saying the Fed would probably begin raising rates sometime in the not-too-distant future. Plosser is a well known inflation hawk at the Federal Reserve. Read more about his comments at this url:

http://tinyurl.com/mhd8bu

GNMA

Caller: This caller wanted to know why Bob recommended GNMAs so much. Bob said GNMAs are backed by the United States Treasury. They do not have credit risk, only interest rate risk. Bob said he estimated that the net asset value risk in the Vanguard GNMA fund that he recommends means that the fund could trade between the mid-$9s to the mid-$10s. The yield on the Vanguard GNMA fund right now is about 4%.

David Korn: Can’t argue with success. The net asset value of the Vanguard GNMA Fund that Bob recommends (ticker: VFIIX) closed today at $10.63 — very near the high.

HEALTHCARE REFORM

Brinker Comment: Bob said he thinks something might get done in Washington before the end of the year on healthcare legislation. What will be the impact? Bob said it will be dramatic on a lot of people, but small businesses are going to be caught right in the middle because if you are an employer today who does not offer health care coverage, you are going to have to pay a payroll tax of up to 8% a year. That will be a penalty for not providing coverage. Moreover, even if you do provide coverage, and the government determines it to be inadequate (in their opinion), then you are also going to be penalized. The reality is that the vast majority of jobs in our country are created by small business so the impact of this legislation is a big deal. If a small business is going to be subject to a new 8% payroll tax because they aren’t offering insurance, they might have to cut payroll.

The legislation, as it is developing, is going to require 20-somethings to purchase health insurance policies that will not reflect the risk of illness that they statistically have which is very low when you are that age. The 30-somethings will probably grossly over pay as well so that the premiums that seniors pay is lower.

One of the ways Congress wants to pay for this is a 5.4% surtax on high earners. Bob said he thinks Nancy Pelosi really likes this tax and thinks it is the greatest thing out there. Bob noted that in California, the top state income tax bracket is close to 10.5%. If you add the proposed surtax, and consider uncapped Medicare (2.9%), and then you figure the top federal tax bracket is most likely going to 39.6% in January 2011, the tax burden for high earners will be in the upper 50 percentile! That means that an entrepreneur might take home only a little more than 40 cents on the dollar. Bob said Washington doesn’t seem to get it and if health care reform is so valuable, why would you only ask people making over a million a year to pay for it.

The health care plan is going to be extremely expensive, with estimates anywhere from $1 trillion to $1.6 trillion for a decade. This will be the biggest social reform since the Medicare act of 1965. Other than nailing the top brackets. Congress seems to have no other ideas on how to pay for it. Bob conceded that nobody feels sorry for people who make over a million a year, but there’s a very limited number of people making that money, maybe six tenths of 1% of taxpayers which means that on a thousand tax returns, you might have 6 returns that would be in that category. Its hard to imagine raising that much revenue from so few people.

David Korn: One of my subscribers looked up this information on the 1040 Quickfinder tax guide for tax year 2008 and found the following information:

IRS Statistics for 2006 returns:

Total number of returns with income of $1,000,000 or more: 339,138
Total number of returns with positive AGI: 135,719,160

The site says 2.5% of taxpayers in 2006 that had an AGI over $1 million or 2-3 returns out of 1,000.

TAX INCREASES

Caller: What impact will all the tax increases coming up have on the stock market? Bob said the tax increases will probably go into effect in 2011. So far, it seems that tax increases will mostly impact people making more than $250,000 a year which is a tiny group of people relative to all tax payers. As a consequence, Bob said he does not see a direct correlation between higher taxes on higher wage earners and the stock market.

David Korn: I agree, although the indirect impact could be significant. Higher taxes, means less discretionary income. Which means less spending. Which is usually not a good thing for an economy that relies on consumer spending so much.

Brinker Comment: Keep an eye on states that don’t have a government printing press. There are states that will be under pressure to raise taxes to get revenue. This can be substantial.

MUTUAL FUND DINOSAURS

Caller: This caller has a lot of his 401(k) invested in mutual funds. He heard a show where an advisor saying that mutual funds are for dinosaurs and that exchange traded funds are the way to go. Bob said anybody who calls mutual funds dinosaurs because of ETFs would be irresponsible. For starters, ETFs are a type of mutual fund. You can buy the Total Stock Market Index with an outfit like Vanguard for very low expenses. It has dividend reinvestment options, statements that are mailed you and the diversity of the whole market in a one fund. You can buy an exchange traded fund that is essentially the same thing, it just trades in real time. Anyone who makes this kind of statement is probably trying to make money off of that and it is absurd.

David Korn: According to a survey in April, advisors expect clients to allocate 14% of their portfolios to ETFs, up from 8% now and 5% in 2007. Read the article entitled, “Advisors Predict More ETF Buying” at this url:

http://tinyurl.com/kv64j9

MONEYTALK GUESTS

On Saturday, Bob had on Lawrence McDonald, author of the book, “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers

On Sunday, Bob had on Charles Geisst, author of the book, “Collateral Damaged: The Marketing of Consumer Debt to America.

David Korn Links:
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