Pre-Refunded CA GO Bonds

Last weekend a caller asked Bob Brinker if he still felt California General Obligation Bonds he recommended in the past were good, safe investments or if she (the caller) should sell them.

Brinker's reply was

"That's a personal decision, Pamela. I really can't tell you what to do with your bonds. I have some California bonds, but in almost all cases my bonds might be different than your bonds and I'll tell you why. The bonds that I own have Treasuries behind them. In other words, they've been pre-refunded by earlier transactions by the state and backed by Treasuries. So in almost all cases, the California bonds that I own are actually backed by Treasuries and are not backed by the State of California....."

Honeybee gives a full report of the call at Summary: Bob Brinker's Moneytalk December 20, 2008

I looked up what "pre-refunded" means. It simply means Brinker's bonds will be "called" so he will soon get his money back. It is similar to refinancing your home mortgage where the borrower will get a better rate and you have to invest your cash now at very unattractive interest rates. For example, Vanguard's Prime Money Market Fund is only paying about 2.43% these days.

It may also mean he sold his CA GO bonds and bought some of these "prerefunded CA GO Bonds" in the secondary market for their safety but lower interest rate. If he did that, then he should have told the lady caller he sold his CA GO bonds to get safer ones.

If they were called away, then Brinker won't get the interest rate he thought he would get for the full term when he bought the bonds. Brinker will get his money back early and will have to reinvest the money, perhaps at much lower rates than had he bought a CD. Brinker 's audience probably could have done much, much better locking money into CDs (CD Rate Survey) which are not callable so they get the good rates for the full term.

From BondDesk.com Glossary:

Callable Bond: A condition of a bond permitting the issuer to redeem it before maturity on specified dates at specified prices.

Pre-Refund: Bonds that will be called on the stated call (pre-refunded) date. The monies used to call the bonds are on deposit in an irrevocable escrow account from the proceeds of a more recent bond issue from the same issuer. Bonds are pre-refunded in order to take advantage of the lower interest rates, thus lowering the issuer's interest expense.

Call Risk: For a REMIC, the risk that declining interest rates may accelerate mortgage loan prepayment speeds, causing an investor's principal to be returned sooner than expected. As a consequence, investors may have to reinvest their principal at a lower rate of interest.

I don't know why Brinker did not say his bonds have been called and he will get his money back early or he sold his CA GO bonds to buy this safer investment. Maybe he didn't want to admit his advice to buy them turned out to be poor compared to buying CDs of the same term. It would be a good lesson on why buying bonds has risks not often mentioned.

The very low treasury rates for short term monies could be from demand from states like CA buying short term treasuries to "pre-refund" the debt they refinance at lower rates.

• US Treasury Rates at a glance

I also don't know why he refused to answer the caller and give a recommendation for the bonds she owned if they were not called.

With rates so low, banks will try to sell you their annuity products. Make sure you read my article:

Beware of Annuities

"Highest CD Rate Survey + Current US Treasury Rates"

Term	Date	Highest Rate (APY)	Where? (Click link for Full Rate Sheets)
Daily Savings	12/21/08	2.43%	Vanguard Prime Money Market Fund
Tax Exempt	12/21/08	1.03%	Vanguard Tax Exempt Money Market Fund
Online Savings	12/21/08	3.00%	High Performance Money Fund @ Wachovia Bank
3-Month Treasury	12/21/08	-0.01%	US Treasury Rates at a glance
6 Months	12/21/08	3.51%	Fultdirect.com & 3.50% @ Corus Bank
6-Month Treasury	12/21/08	0.14%	US Treasury Rates at a glance
7 Months	12/21/08	2.00%	Wachovia Bank
1 Year	12/21/08	3.90%	MetLife Bank
1 Year Treasury	12/21/08	0.37%	US Treasury Rates at a glance
18 Months	12/21/08	3.95%	MetLife Bank
2 Years	12/21/08	4.25%	MetLife Bank
2 Year Treasury	12/21/08	0.74%	US Treasury Rates at a glance
3 Years	12/21/08	4.35%	MetLife Bank
3-Yr Treasury	12/21/08	1.03%	US Treasury Rates at a glance
4 Years	12/21/08	4.51%	Flagstar Bank & 4.35% @ MetLife Bank
5 Years	12/21/08	5.00%	Washington Mutual - WaMu
5 Yr Treasury	12/21/08	1.36%	US Treasury Rates at a glance
7 Years	12/21/08	4.75%	Pentagon Federal Credit Union
10 Yr Treasury	12/21/08	2.12%	US Treasury Rates at a glance
10 Years	12/21/08	4.15%	Intervest National Bank
30 Yr Treasury	12/21/08	2.55%	US Treasury Rates at a glance

Comment on This Article

Merry Christmas, Happy Hanukkah to all!!

Bob Brinker's Bear Market Definition

Bob Brinker defines a bear market as any move 20% off the peak on a closing basis. That is Brinker's definition.

The S&P500 all time record high was set last October at 1565.15. A 20% off bear market, according to Bob Brinker, would be any close at or below 1252.12. I show both these levels on the chart of the S&P500 closing values along with Bob Brinker's two "all in" buy signals where he recommended his readers lump sum any new money into the market.

[ALL charts are clickable to view them in full size.]

The official definition of a bear market on pg 745 and 747 of "Technical Analysis of Stock Trends" by Robert D. Edwards and John Magee doesn't list a specific percentage but plenty of talk about bull markets end when the "public" tries to profit from a rising market. I can't think of a better example of this distribution phase when a well known National radio host (Brinker) told his readers a secular bear market he told them they were in all the way up from the 2002 bottom ended the year before (in Summer 2006)... nearly to the day the markets peaked!

• Technical Analysis Bible: Technical Analysis of Stock Trends

I like to use intraday trading numbers for my market analysis since those show prices traders can actually buy and sell rather than what the very last trade of the day went off at, a number that is often manipulated.

This next chart shows we've already had a 20% bear market on an intraday basis.

The Good news in the chart is it clearly shows we are testing those March 2008 bear market lows now on what looks to be lower volume. Of course, the March low was at lower volume than the Januarly low, so the hope is we are slowly exhausting the sellers.

What I am hoping we are seeing now is the washout phase discussed in "Technical Analysis of Stock Trends" that ends bear markets.

Watch this chart to see intraday trading as it will update in real time if you return here.

Note: Bob Brinker has been FULLY INVESTED in all his model portfolios since March 2003. He has advised his subscribers to dollar cost average new money into the market except for special "all in" buy levels in the mid 1400s and again in the low 1300s that have not worked out too well. See Bob Brinker's Asset Allocation History.

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• Excerpts from my 10/19/07 newsletter when I advised taking profits last year at 1540.
  
  
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Bob Brinker and NBER Recession Definitions

Last weekend Bob Brinker said there has never been a recession without two quarters of negative GDP growth.

• “In order to have a recessionary report, you would need a negative number followed by another negative number in the next quarter. So you would need two consecutive quarters, using the historic, the traditional, the academic definition of a recession that’s been used of decades."
  From Summary: Bob Brinker's Moneytalk, May 31, 2008

Bob Brinker sometimes makes up his own defintions so what he said in the past can be correct. His definition for a recession seems to be no different.


I decided to check with the National Bureau of Economic Research, NBER or "the horse's mouth," to see what their "official" definition of a recession is.


From About NBER website:

• "Founded in 1920, the National Bureau of Economic Research is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community."
  .
  The NBER is the nation's leading nonprofit economic research organization. Sixteen of the 31 American Nobel Prize winners in Economics and six of the past Chairmen of the President's Council of Economic Advisers have been researchers at the NBER. The more than 1,000 professors of economics and business now teaching at universities around the country who are NBER researchers are the leading scholars in their fields.

So NBER clearly is THE organization that DEFINES recessions for the academic community.


Recession Comments From NBER:

• Defintion: A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.
  From The NBER’s Recession Dating Procedure
  .


• "Although a recession is usually accompanied by a decline in GDP, the popular press definition of "two quarters of declining GDP" is not the official standard."
  From "Looking for Signs of Recession?" By Martin and Kathleen Feldstein
  .


• "Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?
  .
  A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001, the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology. "
  From The NBER’s Recession Dating Procedure Q&A Section

Conclusion: Bob Brinker continues to have a VERY entertaining radio show that gives us good ideas to think about but you can not take his word for the truth for even the most basic of things like the "academic definition" of a recession.

Market Update & Follow-Through Day Definition

Bob Brinker liked the market for lump sum purcase in the "mid 1400s" and again in the "low 1300s." The markets are currently in the "high 1200s" so he must really like them now for purchase.

Click charts courtesy of Stockcharts.com to see full size images

More Brinker related charts below

From Bob Brinker According to Mark Hulbert by Honeybee:

• January 4, 2008 Marketimer, Page 3; Paragraph 1; Brinker said: "In summary, the Marketimer stock market timing model indicates that conditions are favorable for the market as we enter 2008" .......we continue to rate the market attractive for purchase on any weakness into the S&P 500 Index mid-1400's range."
  
  February 4, 2008 Marketimer, Page 3; Brinker said: "We recommend a dollar-cost-average approach for new stock market investing at this time. There are no changes to our model portfolios." (Honeybee EC: model portfolios 100% invested.)
  .
  March 4, 2008 Marketimer, Page 3; Paragraph 5; Brinker said: "We rate the stock market attractive for purchase on any weakness that occurs in the area of the S&P 500 Index low 1300's, or any minor weakness that occurs below that level."

Follow-Through Day

Every bull market starts with a follow-through day. But not every follow-through day triggers a new bull market.

Definition of Rally Follow-Through Day

• Many pundits on TV are saying we failed to have a follow-through day today because the markets went down. They are wrong according to Investors Business Daily or IBD. IBD says we have to wait for the window to open for a follow-through day.
  .
• For a follow-through to occur, you want it to land between Day 4 and Day 7 of the attempted rally. On any one of those days, you're looking for one or more of the major indexes -- the Nasdaq, S&P 500 or Dow -- to rise 1.7% or more in higher volume than the previous day.

The article shows charts and gives more information on what to look for in a follow-through day.

MORE CHARTS

QQQQ:


TEFQX: This is Bob Brinker's Business-to-business (B2B) internet fund recommendation in Feb 2000 Marketimer that he continues to have on HOLD.

Critical Mass for Investors: Definition of Term

"Critical Mass" is a term made popular by Bob Brinker, host of ABC Radio's "Moneytalk" and editor of the newsletter called "Marketimer." For investors, your investments are said to have reached "critical mass" when your investment portfolio can generate enough growth and income to meet your lifestyle needs and protect you against the ravages of inflation without you having to work.

Reaching critical mass gives you the financial freedom to retire or work at a job for the love of the work rather than the money!

For example, if you need $50,000 a year to live on, then using the "4% safe withdrawal rate" rule-of-thumb, you need $1,250,000 to retire. ($50,000 divided by 0.04)

• See article: Safe Withdrawal Rate in Retirement?

Generally, a good critical mass portfolio has between fifty and sixty percent of assets in a well diversified basket of equities with perhaps ten to twenty five percent of that in international funds and the remainder in something like a total bond fund, CD ladders or United States Treasuries or GNMAs.

Rule of Thumb:

A good rule of thumb is, with regular rebalancing, a 65 year old can take 4% a year out of a "balanced portfolio" that has 50% of assets in the total stock market and 50% in the total bond fund at Vanguard or Fidelity. Both fund families offer very low cost index funds. If you go elsewhere, then the amount you can "safely" take out of your portfolio will be reduced by the higher expenses for the index funds.

What is meant by "safely?"

A "safe withdrawal rate" means there is a 90% or greater chance you will not out live your money by removing that amount at the start of each year.

"The Retirement Advisor newsletter" (only $99 a year!) gives three fairly conservative portfolios that range in equity exposure from zero to fifty percent.

• 2007 Results:
  
  The Retirement Advisor Aggressive Growth and Income Model Portfolio 1, designed for someone approaching retirement who is interested in a portfolio allocation designed to provide income and capital appreciation while avoiding excessive risk, gained 9.52% in 2007, its first year of existence. This portfolio was 50% in stock index funds and 50% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection which we feel allows a lower allocation to equities and a 4% withdrawal rate.
  
  The Retirement Advisor Moderate Growth and Income Model Portfolio 2, designed for someone who has retired and seeks to maintain their current standard of living, even with inflation, gained 8.48% in 2007, its first year of existence. This portfolio was 30% in stock index funds and 70% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection
  
  The Retirement Advisor Conservative Capital Preservation Model Portfolio 3, designed for someone in the later stages of retirement who wants to avoid any losses in their portfolio and who does not need a lot of inflation protection, gained 8.32% in 2007, its first year of existence. This portfolio was 100% in fixed income index funds (or ETF equivalents.) It benefited greatly from TIPS for inflation protection.

CLICK HERE to download the free, inaugural issue of "The Retirement Advisor" that has the portfolios that gave the above returns. You will need to SUBSCRIBE to get the latest portfolios since we made some changes to the model portfolios for 2008.

Other Definitions of Critical Mass:

"Critical mass" in physics refers to the amount of fissile material needed to sustain a nuclear chain reaction which will generate power or, under the proper conditions, explode (such as an Atomic Bomb). Wiki says for a bare sphere of fissile material, that the critical mass is about 50 kg for uranium-235 and 10 kg for plutonium 239. One needs to take what you read at Wiki with a "grain of Plutonium" as it is not always accurate.

"Critical mass" is also enough bike riders on the Streets of San Francisco to shut the city down. The group that does this calls themselves "Critical Mass."

Core and Explore Portfolios

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