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

Bob Brinker Market Advice: Buy on Weakness

Bob Brinker told a caller yesterday that this is a good time to be in the stock market.

At about 52 minutes into first hour of yesterday's (Saturday) Moneytalk, a caller named Steve told Brinker that he was 55 years old, 100% in cash and about five years from retirement.

Steve asked:

"I've been in all cash until now and I'm considering taking that cash and going about 60% into the stock market and 40% into fixed income. Would you buy the market outright at its current levels or would you dollar-cost-average in?"

This call struck me as odd, perhaps a plant. Brinker has recommended a fully invested position since March 2003. Brinker has not changed this advice to be fully invested since he became fully invested in March 2003 in the low 800s, about the point the market corrected to last Monday.

Why would someone 100% in cash who follows Brinker ask Brinker his market advice after Brinker has been saying BUY, BUY BUY all the way down?

Last year in late May, Bob Brinker went so far as to bash the "Cassandras" for being bearish when the the stock market fell to 1400.

• See the 5/31/08: Cassandra Bashing
• Bob Brinker's Moneytalk: Excerpts, Summary and Commentary, April 25, 2009

Brinker replied to Steve:

"Well our recommendation to our subscribers has been to be a buyer on weakness. We have regarded the market as a buy on weakness. That is our view and that's certainly a view that has not changed in recent weeks."

That is right. Brinker had "lump sum" and "gift horse" buy levels for the market with the first in the "mid 1400s" early last year before the bear began. Brinker had "all in" or "buying opportunities" (not dollar cost average buys) for the market at:

• March 7, 2007 @ S&P500=1380: @1380
• August 16, 2007 @ S&P500=1411: Mid 1400s
• February 10, 2008 @ S&P500=1331: Low 1300s
• August 5, 2008 @ S&P500 1285: Low 1240 or less
• September 2, 2008 @ S&P500=1282: Low to mid 1200s
• January 15, 2009 @ S&P500=850: Low to mid 800s
• March 5, 2009 @ S&P500=696: Looking to identify a bottom (no buy at all in the newsletter and he admits the market trying to "registering the final bottom" had "rendered our efforts to date unsuccessful." )
  
• April 3, 2009 @ S&P500=797: "any short0term weakness" is a "buying opportunity."
  (101 points higher! Says he thinks the bottom is in but did not give a specific number for "weakness.")
  

Now that the market has fallen from the 1500s to 676 and recovered to the mid 800s, his current advice is to "buy on weakness." I guess he put his neck out so many times and got it slashed that he's no longer going to be specific, on the radio or his newsletter.

I have his past "lump sum by levels" listed on the graph below.

Brinker continued:

"We are a buyer on weakness. You had tremendous weakness on Monday. I mean it knocked the thing all the way down to the low-800's on a false news story. So that's the kind of opportunity that is presented. And yeah, I'd be a buyer on weakness. I don't have any problem with your asset allocation. I think that as you move into retirement down the road, you might go to a balanced approach."

At the market top in 2007, Bob Brinker has his "balanced" model portfolio #3 two thirds (66%) in equities, not 50%. Brinker specifically told a caller to the show his advice was to not rebalance to 50% equities because he was so bullish for the market. That advice has not worked out too good for him.

Brinker continued:

"But if you are going to start out with objectives in the 60 to 40% range, equities over fixed income, I'm okay with that. I think there opportunities to make money in the stock market. This is a good time, I think, to be in the stock market. And I think that people that are in the stock market right now are going to be happy they are as we move forward. There's no question about it, the credibility of the stock market has been severely damaged in the marketplace by the high jinks resulting from the repeal of the uptick rule, the high jinks we've seen in terms of false news stories. But in that case, it presents an opportunity."

In his December 2007, Marketimer, Bob Brinker said:

“We continue to rate the market attractive for purchase on any weakness in the area of the mid-1400’s range of the S&P 500 Index. Any additional weakness below this range is regarded as a gift horse buying opportunity. We prefer a dollar-cost-average approach for new purchases when the S&P 500 Index is above the mid-1400’s range.”

Summary:

When the S&P500 in the 1500s about eighteen months ago, Brinker said the mid 1400s level as a "gift horse" buying opportunity to lump sum in new money. Now that the market has crashed over 50% to 676 and recovered to the mid 800s, he is a "buyer on weakness."

Market Statistics 4/24/09 (not counting dividends):

Index	Ended Week	YTD
DJIA	8076.29	-8.0%
S&P 500	866.23	-4.1%
Kirk's Explore Portfolio Free Sample - Subscribe		+3.1%

Graph of Bob Brinker's "ALL IN" Buy Levels

Click graph courtesy of stockcharts.com to see full size image

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Bob Brinker's Partner, Genworth Financial, Failed for TARP Fund Qualification

Bob Brinker's Partner Genworth Financial has failed to qualify for TARP funds. According to Reuters,

"Genworth abandoned its TARP request, saying the Office of Thrift Supervision had failed to approve its application to become a savings and loan holding company.

Genworth had planned to buy Interbank fsb, a Maple Grove, Minnesota, lender, to be eligible for TARP money."

On Brinker's website under Money Management Services he writes:

Bob Brinker has partnered with Genworth Financial Asset Management to offer a personalized and professional money management service. Dollar cost averaging strategies are also available for those investors who want to minimize entry point risk. The account minimum size is $100,000. A financial agreement exists with GFAM for services, including referrals. Please refer to Schedule H for details.

The article from Reuters continues:

"'I don't believe Genworth has a viable business model in the current market environment,' said Alan Rambaldini, an equity analyst at Morningstar Inc in Chicago. 'The question is whether Genworth can muddle through the next couple of years until the economy turns around. That's the only thing that can save them.'"

Over the years, Brinker has told those interested in buying bonds of troubled companies to look at the stock price. He says avoid buying the bonds of companies whose share price has tumbled. Stockholders come behind bond holders in a liquidation, but your odds of being repaid your bond money are higher when the stock price is high where the company can sell shares to raise capital to repay the bond holders.

Click graphs courtesy of stockcharts.com for full size image

If you have money at Genworth Financial, or any money management company, you want to make sure your account is insured by SIPC. The Securities Investor Protection Corp (SIPC) insures accounts for up to $500,000 in cash and registered securities. Non-SEC-registered investments, for example commodity futures contracts, are not insured by SIPC.

IF you have money at Genworth, or any other broker whose share price has tumbled to penny stock status, and it is insured by SPIC, then I'd consider keeping the amount under the $500,000 coverage limit, especially when people question the company as a going concern.

Mark Hulbert on Bob Brinker's Marketimer Performance Record

About once a year, Mark Hulbert does a full page write-up on each of the newsletters he follows. In April of 2009, Hulbert did a full page on Bob Brinker. This was what he said about Brinker's results that do not include Bob Brinker’s QQQ mistake”.

"Brinker’s fund selections on average have lagged the market. The HFD reports an 8.7% annualized gain for his “Aggressive” portfolio, which is 0.6 percentage points per year less than what this portfolio would have made if each of its funds were invested in the DJ Wilshire 5000 during the times they were owned.”

"Please note: In late 2000, Brinker forecasted a several-month bear market rally and recommended an investment in the NASDAQ 100 Index—a trade that turned out quite unprofitably. However, because Brinker at the time of making this forecast chose not to make this trade part of his model portfolios, his HFD record has not suffered as a result."

__ March 2009 by Mark Hulbert on Pg 4 of the April 2009 issue of "The Hulbert Financial Digest"

This is what Mark Hulbert said in March of 2008:

"Brinker’s fund selections on average have lagged the market. The HFD reports an 11.5% annualized gain for his “Aggressive” portfolio, which is 0.9 percentage points per year less than what this portfolio would have made if each of its funds were invested in the DJ Wilshire 5000 during the times they were owned.”

Hulbert attributes Brinker's under performance relative to the markets to his mutual fund selection. In an attempt to mitigate this under performance, Brinker added an "active passive" portfolio using two Vanguard funds to his newsletter. Currently, this portfolio consists of Vanguard's Total Stock Market Index Fund (VTSMX) and Vanguard's International Growth MANAGED mutual fund (VGMFX, a fund I have owned for nearly 20 years for its great performance.) Brinker does not track these or give performance data for them in his Marketimer newsletter, but Mark Hulbert has attempted to track the performance. Mark concludes Brinker's timing ads some value using this portfolio.

For investors who therefore are interested only in his timing, as opposed to his fund advice, Brinker provides an “Active/Passive Portfolio.” It “is designed to provide active management in the areas of long-term market timing while maintaining an indexed approach to the U.S. equity market.” From the beginning of 2002, when the HFD began monitoring this portfolio, to 3/31/09, this portfolio gained 1.3% annualized, vs. a 2.1% annualized loss for the DJ Wilshire 5000.

Hulbert neglects to mention that a portion of this "active/passive" portfolio is in a MANAGED, INTERNATIONAL fund so its benchmark should not be the Wilshre 5000, but a mixture of the Wilshire 5000 and the suitable weighting in an international index. Thus, I conclude that Mark Hulber's conclusion is worthless in gauging if Brinker's timing adds value.

On several Brinker portfolios Mark Hulber tracks, Hulbert reports somewhat different returns than Brinker shows for the specific time periods, some better and some worse. I wrote Hulbert to ask why. Mark said they "periodically undertake various rebalancing transactions to bring a given fund’s actual % weight in a portfolio into line with the % that Brinker assigns to it." I wrote that Brinker has specifically recommended against rebalancing so this "rebalance premium" could more than explain the slight performance edge, especially during a highly volatile market. Clearly, Mark Hulbert admits they don't measure Brinker's performance the way Brinker recommends!

Mark Hulbert also does not adjust Brinker's model portfolio returns for all the "lump sum buys" Brinker issued between 2007 in the "mid 1400s" all the way down to the last "lump sum buy with new money" in the "mid to low 800s" just before the market crashed to 676. To be fair, neither does Brinker.

Click chart courtesy of Stockcharts.com for full size image

Mark Hulbert also leaves out the effect of Brinker's QQQ advice on reported results. Add to that his conclusion that Brinker's market timing has added value since 2002 uses faulty assumptions and you have to ask "why does Mark Hulbert bend over backwards to give Brinker every benefit of the doubt when the record clearly shows Brinker's market timing has added dubious, if any value?"

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 16% vs. NASDAQ down 22% vs. Warren Buffett's Berkshire Hathaway (BRKA) up 33% (All through 4/30/09)

As of April 30, 2009, "Kirk's Newsletter Explore Portfolio" is up 5.2% YTD vs. DJIA DOWN 6.9% vs. S&P500 DOWN 2.5%.

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Bob Brinker on Ginnie Mae Funds: Vanguard vs. Fidelity

Bob Brinker told a caller today he likes Vanguard's Ginnie Mae fund over Fidelity's Ginnie Mae fund. A quick comparison of the two funds (below) shows the Fund from Fidelity has done better than the fund from Vanguard over the last 1 and 3 years.

Bob told the caller he likes the fund from Vanguard due to the lower cost basis.

Both funds are actively managed. Fidelity gets away with charging more because they currently offer better performance even with the higher fees. If you go to their web sites, it looks like the two funds have quite different average maturities and durations which probably accounts for the 7.64% return for Fidelity compared to 6.96% return at Vanguard for the past year.

GNMA means Government National Mortgage Association

From Vanguard GNMA Fund Investor Shares (VFIIX Charts)

• Seeks to provide a moderate level of current income.
• Invests primarily in Government National Mortgage Association (”Ginnie Mae”) securities. These securities are backed by the U.S. government to provide timely payment of principal and interest.
• Follows no specific maturity guidelines but typically maintains a dollar-weighted average maturity of 3 to 10 years.

Performance
Average annual returns—updated monthly as of 03/31/2009

Vanguard 1 Yr 3 Yr 5 Yr 10 Yr GNMA Fund Investor Shares 6.96% 6.91% 5.27% 5.91% Barclays US GNMA Index 7.49% 7.26% 5.50% 6.06%

VFIIX Characteristics as of 02/28/2009:

Average maturity	2.3 years average maturity An average of the maturity dates for all securities in a money market or bond fund. (The maturity date is the date that a bond or money market instrument buyer will be repaid by the security's issuer.) The longer the average maturity, the more a fund's share price will move up or down in response to changes in interest rates.
Average duration	1.8 years

Fidelity Ginnie Mae Fund (FGMNX)

Expense Ratio = 0.45%

Performance:
Average Annual Total Returns (%) as of 03/31/2009

Fidelity GNMA	FGMNX
1 Year	7.64
3 Year	7.10
5 Year	5.16
10 Year	5.66

	Years
Weighted Average Maturity as of 03/31/2009	4
Option Adjusted Duration as of 03/31/2009	1

Note: Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.

Vangaurd Equity Index Funds::

Total Stock Market (VTSMX)
S&P500(VFINX)
Extended Market (VEXMX)

Vangaurd Fixed Income Funds:

GNMA (VFIIX)
Total Bond (VBMFX)
TIPS (VIPSX)
High-Yield/Junk Bond (VWEAX)

US Treasury Rates at a Glance - LIBOR Rates at a Glance

Doubled Money in a Down Market!

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 106% (over a double!) vs. the S&P500 DOWN 11.3% vs. NASDAQ down 16.3% vs. Warren Buffett's Berkshire Hathaway (BRKA) up 27.7% (All through 6/30/09) (More Info)

As of June 30, 2009, "Kirk's Newsletter Explore Portfolio" is up 6.2% YTD vs. DJIA down 3.8% vs S&P500 up 3.2% YTD
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Bob Brinker Turns Bearish!

After calling buying opportunities all the way down from the top with a rare "gift horse" buying opportunity for the S&P500 in the mid 1400s, Bob Brinker is now a bear. Without going into further details, this picture is worth a thousand words why.

This next chart shows Brinker's buy levels for "new money" since 2007.


Note, Bob Brinker has been fully invested since March 2003. He rode the great bull market all the way to 1576 then down to 676 without taking a dime of profits so he had no money to put to work near the lows.

For the clueless, this is an "April Fools" prank which means I was joking and Brinker is still bullish and looks for a higher market in the future. Enjoy your day!