These are my observations of what Bob Brinker said of note during "Moneytalk" on Saturday November 11, 2009.
Bob quoted statistics on how well the market has done this year. He didn't say it remains down considerably from its 2007 highs. Here are the returns without dividends:
| Index | YTD % |
| DJIA | 17.0 |
| Nasdaq | 37.5 |
| S&P 500 | 21.1 |
| Russell 2000 | 17.4 |
With dividends included, the S&P500 fund at Vanguard, VFINX, is up 23.69% and the total stock market is up 25.12%.
What I find amazing is Vanguard's Emerging Markets index fund (VIEIX that I recommend in my newsletter for your core portfolios) is up 72.24%! Vanguard's Total International index funds, VGTSX, is up 36.89%. By owning international funds, we've benefited from a falling dollar.
This chart of the S&P500 shows it remains down considerably.
Click chart courtesy of stockcharts.com for full size imageBob took a call about iBonds where he acknowledged that the inflation adjustment for the last 6 months was 3.06%. See my article:
Brinker said we have slight deflation on a year-over-year basis due to the problems in the financial market meltdown but now we are returning to more normal inflation. He said those who had been predicting "runaway inflation" were wrong. He said he now predicts inflation will be "moderate" going forward but he didn't define exactly what moderate means.
Kirk's Comment: The Federal Reserve is comfortable with core inflation (inflation without food and energy) between one and two percent. One reason inflation came in so high (3.06%) for the last six months is the price of oil about doubled over the 6-month period (March to Sept 2009) used to calculate the iBond inflation adjustment.
Click chart courtesy of stockcharts.com for full size imageCalls on Brinker's Favorite GNMA Fund from Vanguard,
VFIIX ( Charts).
Bob noted that the fund is trading at an all time high of $10.84.
- In past shows (you can search this blog to find summaries) he had predicted the fund would range between $9.50 and $10.50.
- He currently says the fund can trade "in the nines and tens"
Kirk's Comment: A rage of "nines and tens" equates to $9.01 to $10.99. If VFIIX drops to $9.01 from its current net asset value (NAV) of $10.84, this will be a decline of
($10.84 - $9.01) / $10.84 x 100% = 16.9%!!!
I recently sold my personal and newsletter explore portfolio position in VFIIX and bought a 5-year TIPS directly from the US Treasury at the recent auction. The last time I looked, the TIPS went up a bit more in value than the GNMA fund but what is more important, the TIPS will do well when "moderate inflation" translates into higher interest rates while GNMAs could have low to negative returns. If you have $10,000 to invest, then $5,000 each in paper and electronic iBonds seems a good choice to me compared with money funds or Bob's GNMA fund.
For more information, see:
Bob began the third hour talking about municipal (muni) bonds. He said there are two types of muni bonds to consider:
GO Bonds or "General Obligation" bonds are backed by the full faith and taxing power of the issuing government. He said states that issue GO bonds historically have a very low default rate because they want to protect their credit rating.
Revenue Bonds are backed by the proceeds of a particular project. Bob gave an example of the Pennsylvania Turnpike where revenue bonds were issued to build the toll road then the collected tolls are used to repay the bonds. These work as long as the project is successful defined as generating the revenue necessary to repay the bonds.
Kirk Comment: Even GO bonds can default!
- The most famous defaults of GO bonds are New York City's default in 1975 and Cleveland in 1978.
- The largest default in the history of the municipal bond market was the Washington Public Power Supply System's (WPPSS or "Whoops") default on $2.25 billion in revenue bonds. WPPSS sold revenue bonds to build five nuclear power plants in the 1970s to supply electricity to the Pacific Northwest. Only one of the five planned nuclear plants was completed so there was insufficient revenue to repay the bonds. (Whoops Default)
Bob's guest was Jim Lebenthal, author of the book
Lebenthal On Munis: Straight Talk About Tax-Free Municipal Bonds for the Troubled Investor Deciding 
Current Price: $10.17 & eligible for FREE Super Saver Shipping
(Click to order and support this blog)
Jim said he was in New York when they defaulted on their General Obligation bonds. He said the only way New York was able to get over deficit spending and borrowing was to default (I believe they missed some interest payments.) Jim said the courts ordered the state to repay the bond holders. Nobody would lend New York new money so they were forced to make cuts in spending to balance their budget.
Vanguard Fixed Income Fund Charts:
From 1/1/1999 Through 11/15/09 Kirk's 80:20 Aggressive Core Portfolio is up 50.8%
Kirk's 50:50 Conservative Core Portfolio is up 67.3%
Kirk's 70:30 Explore Portfolio is up 146.1%
(not a typo... up one hundred forty six percent!)
80% Core Aggressive plus 20% Explore is up 69.8%
90% Core Conservative plus 10% Explore is up 75.1%
100% Total Stock Market (VTSMX) is up 18.2%
100% Total Bond Market (VBMFX) is up 78.2%
80% VTSMX and 20% VBMFX is up 30.2%
50% VTSMX and 50% VBMFX is up 48.2%
YTD through 11/15/09 Kirk's 80:20 Aggressive Core Portfolio is up 23.0%
Kirk's 50:50 Conservative Core Portfolio is up 16.4%
Kirk's typically 70:30 Explore Portfolio is up 26.7%
"Kirk Lindstrom's Investment Letter"
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