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Tuesday, August 24, 2010

Bull vs Bear Case - Neener vs Kass & Brinker

Bob Brinker remains bullish.  Honeybee reported Sunday:
Brinker has been forecasting sizable gains in the S&P for 2010 and the winter of 2011. Back in the March, 2010 issue, Brinker said: "Our 2010 target range for the S&P 500 Index remains in the 1200 to 1260 zone." In May, Brinker raised that to "upper-1200's to low-1300's." He nailed the numbers down a bit more in June and July, forecasting the S&P would reach "the 1275 to 1325 range by next winter."
From today's close of 1051.87, Brinker's 1275 to 1325 estimate for the S&P500 means he is predicting a gain of between 21% and 26%!!!

Charles Neener Predicts DOW 5,000
Charles Neener, former Goldman Sachs technical analyst, was on CNBC today talking about his market advice to avoid stocks and buy bonds.
At the same time...
Doug Kass is bullish. In BTIG Fed Model With VIX Risk Adjustment Kass says
What is extremely noteworthy about this metric in the current environment is that the level of equity undervaluation relative to Treasuries today using this model is equivalent to the extreme levels registered in early March of last year.
BTIG Fed Model
Last weekend Bob Brinker said he remains in the bull camp. Of course, Brinker has been fully invested since March 2003. Two guys who correctly called the recent bear market, Kaas and Neener, now disagree on market direction.
We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic. 
Who do you believe?
Make sure you read all three articles:
  1. Charles Neener Predicts DOW 5,000
  2.  BTIG Fed Model With VIX Risk Adjustment
  3. Siegel and Schwartz Bond Bubble Warning
Closing Data for Aug. 24, 2010:
U.S. Indices
Dow Jones

DOW JONES INDU ^DJI - More charts
S&P 500 - More charts

Monday, August 09, 2010

Bob Brinker's GNMA Advice

Yesterday on Moneytalk a caller asked Bob Brinker if he should move his money (about $40,000) out of the Ginnie Mae (GNMA) fund Brinker recommends into something else. The caller was worried that interest rates could suddenly surge and cause the net asset value (NAV) of the fund to fall.
For many years, Bob Brinker has recommended Vanguard's GNMA fund (VFIIX charts and more info) on Moneytalk.  He said he expected the fund to trade between $9.50 and $10.50 so the current price of $11.08 is well above his expectations but makes the advice even better.
The caller's question is excellent because the 30 year chart here shows the fund fell in 1987 from about $10.20 to $8.60 or $1.60 in less than a year. 
  • ( $1.60 / $10.20) x 100% = 15.7%
Brinker's advice to the caller was to use a mental stop-loss of $10.90. That means if the fund falls from Friday's close of $11.08 to $10.90, then you sell your position. That would protect your NAV decline to 18¢ or about 1.6% of Friday's price. Until then, you can continue to collect the interest that is currently yielding 3.15%.
Vanguard GNMA "Ginnie Mae" Fund VFIIX
Stop Loss Warning:  Brinker's advice to use a stop loss of $10.90 for VFIIX is good if you are able to execute it perfectly.  What happens if the fund falls in a day from $10.91 to $10.70?  Will you sell the next day at $10.70 or will you try and wait for a bounce to sell at $10.90?  My experience is people, even Brinker himself with his failed QQQ trade, often end up waiting for a bounce to sell into that never comes. 
IF you are worried about NAV declines, then it might make it easier to sell to protect larger losses at $10.70 if you sell half the fund now at $11.08 and put the money into CDs.  That would still give you an average price of $10.90 should the fund gap down to $10.70 where you then sell the remainder of the fund if it gaps lower than your stop loss of $10.90.
Another trick is set your stop loss HIGHER so you get out before those who follow Brinker's advice.  With Brinker's large listening audience, the gap down the day after VFIIX trades at $10.90 could be huge so perhaps set your stop at $10.95.

Look at how quickly VFIIX jumped in 1987 when money poured out of stocks.

Vanguard's GNMA Fund VFIIX in 1987

Remember too that stocks were doing great in 1987 up until Black Monday.

Vanguard's SnP500 Fund VFINX in 1987
Those two charts show well how bond and stock funds usually go in opposite directions which is why they are so good for diversification.

Many of the stocks in "Kirk's Newsletter Explore Portfolio" are paying a great dividend while selling at very low price to earnings multiples.  My portfolios are up significantly over the past 10 years while the index funds are down.   I expect equities to significantly out perform bonds and probably CDs over the next decade and my portfolio should do even better.

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  Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 204%  vs. the S&P500 UP only 22% vs. NASDAQ  UP a only 19%   (All through 12/9/10) 
In 2009, "Kirk's Newsletter Explore Portfolio" gained 33.5% vs. the DJIA up 18.8%

2010 YTD my "Explore Portfolio" is up
17.4% YTD
(the explore portfolio has 70% in equities and 30% in fixed income so the stocks are doing very, very well)

Sunday, August 08, 2010

Bob Brinker Still Bullish - US Treasury Rates

On today's Moneytalk, in response to a caller asking Bob Brinker about his discussion of "rapid growth" as one of the five root causes of a bear market, Brinker said:
"I do not believe we are entering a new bear market at this time."
Brinker elaborated by saying rapid economic growth has many fallout factors that can lead to a bear market such as:
  • Inflation pressure.
    Certainly not a problem now!
  • Interest rate problems. 
    Investors can get higher rates in fixed income investments that can better compete with equities.
  • The economy starts to run at full capacity since factories are working overtime and it gets hard to hire quality workers so costs start to escalate and bottlenecks form.
Currently, rapid growth is not an issue. In fact, Brinker said the worry now is economic growth is so slow the economy is not creating enough new jobs to keep pace with new workers entering the workforce.

I did a write up a few weeks ago about Brinker's coverage of his "five root causes of a bear market" at
About the only thing that has changes between that summary and now is economic growth is decelerating. To prevent a double dip recession, the FOMC is again looking to increase the money supply via "quantitative easing" or QE. QE (from wikipedia)
"describes a form of monetary policy used by central banks to increase the supply of money in an economy when the bank interest rate, discount rate and/or interbank interest rate are either at, or close to, zero. A central bank does this by first crediting its own account with money it has created ex nihilo ("out of nothing"). It then purchases financial assets, including government bonds and corporate bonds, from banks and other financial institutions in a process referred to as open market operations."
The Federal Reserve said in the minutes of their last meeting that they could start  another round of QE by repurchasing debit  securities as they come due rather than retiring them.  They still have room under QE1 to purchase considerably more debt and some believe they could do a new, QE2.  All this pushed rates considerably lower Friday.

U.S. Treasury Rates as of August 8, 2010

3-Month 0.000 11/04/2010 0.14
6-Month 0.000 02/03/2011 0.18
12-Month 0.000 07/28/2011 0.24
2-Year 0.625 07/31/2012 0.51
3-Year 1.000 07/15/2013 0.75
5-Year 1.750 07/31/2015 1.50
7-Year 2.375 07/31/2017 2.20
10-Year 3.500 05/15/2020 2.82
30-Year 4.375 05/15/2040 3.99

For more, see
US Treasury: Rate Quotes and Rates at a Glance
I will add more comments later after I've had time to listen to the show via ReplayAV.

Before you get too excited about Brinker being bullish now, remember Brinker's newsletter model portfolios one and two have been FULLY invested in equities since March 2003.  His normally 50:50 portfolio three was nearly two thirds in equity at the top and he told callers he was so bullish he did not recommend rebalancing back to 50% equities and 50% fixed income!  Brinker did not see the 2008-2009 bear market coming and was so bullish at the top that he issued a "gift horse" buying opportunity when the SandP500 was in the mid 1400s then he bashed the bad news bears and people like myself warning of a coming recession as "Cassandras."  For proof, see:

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