Bob Brinker Muni, GO and Bond Fund Advice

Many callers have asked Bob Brinker about the potential to lose money in bond funds when interest rates "normalize" from historically low rates. For example, on April 5, 2010 the 10-year US Treasury Bond had a yield of 3.99%. (move the cursor over the chart here for TNX to April 5 to see the rate quoted as a "price").   Much of this year's gains in bonds are due to the yield falling to 2.70% as investors have fled stocks while pouring money into bond funds.  See:

• Equity, Bond & Money Market Fund Flows

• US Treasury Rates at a Glance.

Brinker says if you hold a bond fund the simple thing to do is use a mental stop loss as I explain in the article Bob Brinker's GNMA Advice.

Brinker also points out another way to avoid losing money is to buy bonds directly and hold them to maturity. If you buy US Treasuries or GNMAs directly, then you are guaranteed to get your interest payments plus principle back since the government can borrow money from the Federal Reserve which will turn on the printing press if there are not enough interested in the low rates.

If you own municipal bond funds to lower your taxes, then Brinker says you can buy tax exempt Municipal Bonds directly from your broker. Buy NEW ISSUES to get the lowest fees. If you were worried about the quality of municipal bonds, then Brinker says you could purchase high quality state general obligations (GO Bonds) which have had no failures in over a century.  (As a Californian, I find little relief in that fact given the circus we have in Sacramento giving huge raises and pension benefits to unions that support the people in government that keep spending while the state circles the drain of insolvency.  End of digression.)

My Warning: You need to be careful with Muni bonds because some cities, struggling with the recession, have missed payments and could default. Harrisburg, the capital of of Pennsylvania, is the latest to miss a payment and potentially default.

Pennsylvania capital, Harrisburg, skips payment, may move closer to bankruptcy
Harrisburg Mayor Linda D. Thompson has adamantly opposed declaring bankruptcy, while the move has been been advocated by the city controller and a growing bloc on the City Council. 
and
The city's bond insurance company is expected to cover its upcoming $3.3 million bond payment. But some analysts say relying on that backstop could add to the mounting pressure on firms that provide insurance for the $2.8 trillion municipal bond market.

The good news for investors is the insurance company will make the payments but if enough cities and states like California (even with with insurance) miss payments, it could get nasty.

Seeking Yield for Income Is Risky 

Currently, if you need yield, it means you are taking significant interest rate risk.  Buying bonds directly is fine if your goal is to not lose money but if there is high inflation, then you will lose purchasing power to inflation whereas someone in money funds, TIPS, Ibonds or savings accounts will do much better since we will get higher returns as rates normalize (go up.)  Everyone should be aware that the Federal Reserve is again buying US Treasuries to help keep rates low and nudge investors to take more risk to help the economy grow again.  Rates could surge again when (not if) the Fed stops buying US Treasuries.

Vanguard's GNMA fund, VFIIX, currently has an average duration of 1.7%.  That means if interest rates were to jump 1% overnight, you could expect VFIIX to lose 1.7% in net asset value, NAV.  If they jump 3%, expect NAV to fall by 5.1%, 3 times 1.7%.

• VFIIX Chart and Quotes

I am lucky. I have enough cash flow from my Two Investment Letters, people clicking ads on my blogs and websites plus commissions for products I recommend that I don't need yield to live on.  Thus, I take very little interest rate risk.  I've sold all my bonds and bond funds not indexed to inflation with my own money and in  "Kirk Lindstrom's Investment Letter." 

My personal iBond portfolio currently yields 5.43% (Majority are from Oct. 2001) but of course, I only get the interest at maturity, a great way to defer taxes.  The TIPS fund I got for my Vanguard ROTH by selling the GNMA fund is up 18.4% in under 2 years.  I also hold individual TIPS and a significant holding in the TIPS fund at Fidelity, FINPX, that is up 25.8%.  I suspect those TIPS funds will give back some when rates normalize, but rates probably won't normalize without a significant inflation component so I expect they will do better than bond funds not indexed to inflation.

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 "core plus explore" portfolio approach should do even better.

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Bob Brinker's "Evolving" California GO Bond Advice Ignores What President Obama Did to Chrysler Bond "Speculators"

Yesterday and last weekend Bob Brinker made it quite clear to his audience that his recommendation for California Municipal bonds, including General Obligation (GO) bonds, is NO MORE than one percent of your portfolio in any one issue. This is a big change from the past where he has strongly recommended CA GO bonds with no limits on how much to invest. I also do not think Bob Brinker is paying attention to what President Obama did to bond holders when he gave some of their assets to powerful unions.

At the facebook's "Investing for the Long Term" forum to discuss Bob Brinker, Runner Twentysix said:

Runner Twentysix replied to Honey's post on June 18, 2009 at 12:03pm

I wonder if anyone ran out and bought CA GO's after Brinker, over the past month said there was not chance of the Federal Gov. letting CA go bankrupt. Remember how he said that if CA went bankrupt, there would be no Highway Patrol! There is no chance of that he SHOUTED. If anyone followed his advice and bought, and then heard this weekends show, they have to feel that old Bob just blindsided them. And maybe they loaded up because Bob never mentioned the 1% bond rule before, only his no more than 5% in one stock. It is obvious that he just makes this stuff up as he goes.

George Johnson replied to Runner's post on June 18, 2009 at 6:06pm:

That's why I don't listen to him. Even though he may have some good and wise investment advice, how can you trust a snake oil salesman?

Unlike Brinker, I sold my CA GO bonds as soon as California ran into budget trouble back in 2008. I think Brinker takes too much risk with his fixed income portfolios. Brinker's fixed income results for 2008 were horrible as all four of his "fixed income only" model portfolios lost money while the Total Bond Fund at Vanguard gained 5.1%!

Bob Brinker's 2008 Fixed Income Performance

Every six months, major investment newsletter tracker Mark Hulbert publishes a performance summary for the large investment letters he follows. From "The Hulbert Financial Digest January 2009 Long-term Performance Ratings" Mark lists for last year, 2008:

• Brinker's "fixed income advisor" model portfolio #1 lost 21.7%
• Brinker's "fixed income advisor" model portfolio #2 lost 11.5%
• Brinker's "fixed income advisor" model portfolio #3 lost 5.2%
• Brinker's "Fixed income only" portfolio in “Marketimer” lost 2.1%
  

From listening to Moneytalk, you get the impression Bob Brinker did really well in 2008 since Vanguard's GNMA fund (VFIIX Charts) gained 7.1% in 2008. Obviously, Brinker took a lot of risk with his fixed income portfolios and they suffered in a good year for the more conservative "Total Bond Fund" from Vanguard (VBMFX Charts) that I recommend for the fixed income side of my "core and explore" newsletter portfolios.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 104% (over a double!) vs. the S&P500 DOWN 11% vs. NASDAQ down 17% vs. Warren Buffett's Berkshire Hathaway (BRKA) ONLY up 24% (All through 6/21/09)

Does Bob Brinker Pay Attention to President Obama?

In past months, Brinker surprised me by saying he still liked CA GO bonds because they were by law second in line to be paid from CA revenue after teacher salaries. I thought this was odd to say given President Obama was at the same time attacking Chrysler bond investors, including retired teachers, as speculators when they objected to giving union employees Chrysler assets that they were legally entitled to. My thinking was if President Obama thought it was OK to take assets legally due Chrysler bond investors to give to powerful auto unions, then he would have no problem taking assets due CA GO bond holders to pay salaries of powerful California public employee unions. I am sure there are far more voters working for California than investing it its bonds.

Doubled Money in a Down Market!

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 104% (over a double!) vs. the S&P500 DOWN 11% vs. NASDAQ down 17% vs. Warren Buffett's Berkshire Hathaway (BRKA) up 24% (All through 6/21/09)

As of June 21, 2009, "Kirk's Newsletter Explore Portfolio" is up 5.0% YTD
vs. DJIA DOWN 2.7%
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General Obligation Bonds Are Safe Says Bob Brinker

Bob Brinker gets a lot of calls about how to invest fixed income. If you are not in a high tax bracket, Brinker usually recommends Vanguard's GNMA fund, VFIIX (Charts).

If you are in a high tax bracket, then Bob Brinker recommends general obligation (GO) bonds of states rather than municipal bonds of cities and sewer districts. Brinker said he has a hard time believing that US government will let any state go bankrupt, especially a very large state like California.

In the past, Bob Brinker has recommended California's General Obligation bonds and has said in past shows he still held them.

California, the state I live in, currently has the worst credit rating of all the states due to our huge spending habit, billions of deficit and billions of debt despite a 9.3% income tax and 9.25% sales tax in my county. (I also pay nearly $10,000 a year in property tax for a 4b/2b home on 1/4 acre.)

• See Tax Rates by State for 2008

Bob qualified this by saying he does not believe the US Government will let New York City go bankrupt after the 9/11 attack so it sounds like he may own some of those bonds.

I think there is a bit of spin in Brinker's answer. In the past, he said he would not own general obligation bonds from the state of Louisiana because it had the lowest credit rating of all 50 states. Now that California has a lower credit rating, Brinker probably finds it "easier" to change his advice than admit he might have been wrong about California GO bonds.

Brinker Could be Wrong

I think Brinker could be wrong about the government not letting California go bankrupt. California mostly votes the democratic ticket.

When George Bush was president and we got into trouble with Enron manipulating our rates, Bush left us hanging in the wind. Currently the Democrats control the house, senate and White House, but this could change.

I believe if the US government swings back to the right, perhaps if Obama's plans fail and ignite huge inflation with high unemployment. If we swing to the far right, then the GOP will take over government again. A GOP government would look upon a bankrupt California as proof out-of-control spending and massive taxes are the path to ruin. So, maybe CA GOs are safe as long as they mature before the next presidential election and be wary should the democrats lose the house and senate again.

This article from Smart Money seems to agree with me.

• Could Municipal Bonds Really Default?

It says GOs are safe if you

• keep the terms short
• diversify and
• keep an eye on the credit ratings of the issuing states (similar to Brinker's old advice to avoid Louisiana due to its poor credit rating.)
  

Disclaimer: I sold my CA GO bonds (in my personal account, I use index funds in my newsletter portfolios) at the first sign of California budget trouble last year and got out at par less a tiny amount for a commission.

More Information:

• Article: Bob Brinker's Current GNMA Fund Advice
  
  
• VFIIX charts and current quote

VCAIX, VCITX, iShares S&P California Municipal Bond Fund CMF & CA GO Bonds

Bob Brinker recommended California general obligation (GO) bonds on his show last year. Last weekend a caller said he purchased the Vanguard California Municipal Bond Fund (probably VCAIX or VCITX) and it is down about 2%. He wanted to know if Brinker had any advice now for him.

CMF is the iShares S&P California Municipal Bond Fund.

Brinker said he did not own that fund but he does own General Obligations issued by the State of California which he is holding on to. Brinker said he thinks the great state of California is too big to fail and the federal government will step in to guarantee payment on bonds like it did for New York in the 1970s.

Many investors are in a panic about California's financial crisis. Some Californian municipal bonds are paying an unprecedented tax equivalent rate more than three times as much as Treasuries.

See US Treasury Rates at a Glance

This chart shows the 10-year Treasury is paying about 2.5% now while the table below shows the Vanguard intermediate and long-term CA tax exempt funds are paying 4.15% and 4.64%, respectively.

This could turn out to be the mother of all buying opportunities, or the mother of all muni defaults. Obviously, Bob Brinker is betting on the former. As a California taxpayer, I sure hope Brinker's advice does not turn out to be another bust like his QQQ advice to buy the ETF for the NASDAQ-100 back in late 2000 before it fell from the $80s to the teens.

Table of Vanguard California Tax Exempt Funds and Rates

Name	Symbol			YTD Returns as of 01/06/2009
		Yield
S&P 500 Index Fund Inv	VFINX	2.84%		3.53%
CA IT Tax-Exempt Investor	VCAIX	4.15%		1.04%
CA LT Tax-Exempt Investor	VCITX	4.64%		1.46%
CA Tax-Exempt Money Mkt	VCTXX	0.74%		0.01%

I must admit that 4.64% tax free is a very attractive yield. I have not been inclined to take risk with my fixed income investments but I may reconsider this . One reason for optimism is president elect Obama will be much friendlier to spending addicted, democrat controlled California than president Bush who let Enron screw us by manipulating our energy prices before Enron failed.


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						10 Years
Kirk Lindstrom's Newsetter		2007	2008	Combined		Through 12/31/08
80% Core Aggressive + 20% Explore		6.31%	(29.90%)	(25.47%)		40.95%
95% Core Conservative + 5% Explore (50:50 Balanced)		6.54%	(17.13%)	(11.72%)		49.60%
Brinker Marketimer
Model Portfolio #1 - Aggressive		9.17%	(39.71%)	(34.18%)		49.25%
Model Portfolio #2 - Moderate		9.04%	(37.45%)	(31.79%)		43.08%
Model Portfolio #3 - Balanced		7.94%	(23.86%)	(17.81%)		46.42%
Vanguard Index Funds
VTSMX - Wilshire 5000		5.49%	(37.04%)	(33.58%)		(6.90%)
VFINX - S&P500		5.39%	(37.02%)	(33.62%)		(14.06%)

(Brinker Marketimer 10-year performance includes effect of QQQ advice.)