Moneytalk Bob Brinker Summaries - Information ONLY

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Top 281. Jun 26, 1999 9:07 PM

» David_Korn - David K's Summary is HERE!!!!!!

Summary and Interpretation of
Bob Brinker’s Radio Broadcast
for Saturday, June 26, 1999
by David K. (E-MAIL: davidk555@earthlink.net)

Opening Monologue: With a backdrop to some funky music reminiscent of the beginning of a Chicago Bulls game, Bob began his monologue with his new favorite Chinese proverb, “may you live in interesting times.” Bob noted that we have had a 400% total rate of return in the market since autumn of 1990. We are now in the midst of a meandered market which began in the middle of April, 1999, when the Dow hit the 10,500-11,100 range, and subsequently returned to the mid 10,000 range on three occasions. What is it all about? The market is being held hostage by none other than Alan Greenspan, a/k/a Dr. Greenshades, a/k/a Dr. Greenspeak, a/k/a Mr. Bowtie.

The reason the chairman is holding the market hostage is because of interest rates. As stated by Bob, the most powerful man in the world does not reside in the white house, the most powerful man in the world is Alan Greenspan because he is running the world economy, because he controls the direction of interest rates.

Bob queried over whether Greenspan would raise interest rates more than once? Bob said he will definitely raise interest rates at the end of this month, probably 1/4 of one percent, but who knows beyond that date because we don’t know where the economy is going. The interest rates are ridiculously high if you think that inflation is going to stay around 2%, but not ridiculous if inflation gets as high as 2.5%.

Caller # 1 Robert: This caller wanted to know what Bob thought of John Bogle’s interview on CNN where Bogle said he thought the market could be way overpriced. Bob heard the interview and said people who know the record and writings of Mr. Bogle would be surprised to hear him refer to overvaluation when he generally doesn’t comment a lot on that, since he is a buy and hold long term investor. Bogle is probably reacting to the federal reserve’s model which is clearly stating overvaluation in the market. Bob noted that the federal reserve’s model stated that the market was overvalued back in 1990 when the Dow was in the 6,000s where it was in a spell of “irrational exuberance.” Bob liked the fact that Bogle discussed the benefits of investing in no load mutual funds which he agrees with 100%. The caller also asked Bob if he thought the federal reserve valuation model was helpful. Bob said the federal reserve model is not designed for him, or us, it is designed for the federal reserve open market committee members to determine whether the market is overvalued. This caller’s final question was if our economy is so dependent on imports, won’t that require the federal reserve to raise rates? Bob said the dollar plays a role in regard to interest rates; however, with the international economies growing and coming out of recessions, that is good news for our export accounts and if we have an expanding export account, that can offset our import imbalance. That said, Bob’s primary concern on inflation and interest rates is the labor market and the lack of skilled and qualified workers in our economy.

Editorial Comment hereinafter “EC” : John Bogle is the founder and chairman of Vanguard Mutual funds. He is brilliant and well respected . To read his interview on CNN, the link is: http://cnnfn.com/yourmoney/mutualfunds/9...

Caller #2 Ann: This caller lost money during the bull market which was managed by her broker. Bob said the money was probably lost through her broker’s commissions. The caller is now in mutual funds and is worried about a bear market. IMPORTANT: Bob said his model is still calling for new historic record closing highs, most probably in the Dow, S&P and Nasdaq in the next several weeks. EC: This is the first time I recall Bob also including the Nasdaq as hitting a new closing high along with S&P and Dow.

Caller #3 Jim: This caller just started dollar cost averaging into Vanguard’s S&P500 and total stock market index and wants to know how to further diversity his portfolio. Bob recommends that 75% of an individual’s portfolio be the U.S. market and a great way to do that is to invest in the total stock market index. With respect to the remaining 25%, Bob recommends investing in international funds. EC: No Load International Mutual Funds of course.

Caller #4: Larry: This caller’s mother set up a custodial account for his daughter which only has a small amount of money in it. What should he do? Bob said we are in a dollar cost average policy at this time and to check for a mutual fund that allows investors to contribute small amounts at a time. One such fund family is the TIAA/CREF family.

EC: Check out TIAA/CREF web page at the following link:
http://www.tiaa-cref.org/

Caller #5 Aaron or Eric?: This caller was asking about the portfolios in Bob’s Marketimer that mirror the S&P and Wilshire 5000. Bob discussed his active/passive portfolio which has the entire U.S. stock portfolio in the Wilshire 5000. The caller asked what do we do when the markets reach all time highs? Bob said he will look at his model at that time.

EC: Want more information on the Wilshire 5000, check out http://www.indexfundsonline.com/indexinf...

Caller # 6 Joe: This caller asked why Bob anticipates new highs even though we are facing higher interest rates. Bob said the first reason is because his timing model tells him so. The second reason is it makes common sense to Bob because he thinks the market has received an inflation scare which isn’t justified. The scare began with the spike in oil prices which resulted in the price index scare in April. What we saw is a reaction by the investors in the bond market. Next thing we will see is a rate hike in the nature of one quarter of one percent. The fed will most probably continue to keep their bias or tightening as they see the high growth rate in the Gross National Product. Still, we should see this summer, new closing highs in the Dow, Nasdaq and S&P. Caller: do you expect the internets to participate? I think the bloom is off the rose. The chances of Amazon, Yahoo and AOL recording new highs by the end of this year is close to zero. Why? Maniacal speculation brought these stocks to ridiculous highs only paralleled by the Tulip Mania. Second, valuations don’t even come close to justifying the prices we saw in these stocks when they hit their highs. Take AOL for example. At its high, it was trading at 312 times estimated earnings for year 2000. Meanwhile, the S&P was only trading at 25 times year 2000 earnings. Thus, AOL was roughly 13 times the multiple on the S&P 500. The valuations at the high were a national joke. This caller then said he was fully invested in internet stocks and wanted to stay that way to increase his net worth as quickly as possible. Bob said he would probably have a better chance in Vegas.

EC: Want to read about the Tulip Mania, read, “ Extraordinary Delusions and the Madness of Crowds” by Charles MacKay.

Caller #7 Roger: If the federal reserve does raise interest rates at the end of this month, what will be the market’s reaction? If the Fed raises .25 and maintains the bias, that is what the market is expecting and the market would be comfortable with that. The caller then pressed Bob and asked if the market could tank under those circumstances and Bob noted that the market had held the 10,400-10,500 support and believes that the downside risk is a few percentage points from that support level.

Caller # 8 Jim: This caller wanted to know about Bob’s recommendation on foreign markets. A few months ago, Bob had a buy rating on foreign markets, now he is recommending dollar cost averaging. Second question was whether Bob would post his market timing model on the internet. Bob was rather coy with his answer saying no one ever asked him to do that and his web site is already so full of postings that people wouldn’t have time to read it. (EC: Also, I don’t think Bob wants to give his secrets away!).

Caller # 9 John: This 72 year old invested some money in stocks in October and ended up losing $16,000. Bob said if he had simply invested in an index fund, he would have made money. Bob reiterated that going to a broker to buy the hot stock of the day is not going to get the job done.

Caller # 10 Mike: Asked about the Japan’s PE (Price to Earnings). The caller noted they had a PE of 80 when the bear hit. Bob noted the PE is much lower now and that at that time, Japan also had one of the biggest real estate bubbles in history. Land was so expensive, it was comical. Caller asked if we had the same thing today in California. Bob said no, although there is a speculative market in California, the U.S. overall doesn’t have bubble real estate and the PE of our markets is no where near as high as it was in Japan.

Caller #11 Ann: She has $10,000 she wants to give to grandchild to invest for education. Bob thought the best option was to use and Ugma account. Her second question had to do with the fact that her parents are using variable annuities which were recommended through a financial advisor. She wants to get them out, but they have withdrawal penalties of 6%. Bob says what is the basis for that? Vanguard doesn’t require a confiscation charge. This is an outrage! Bob says under no circumstances should you ever consider buying an annuity with a surrender charge. Why? Because there are no load annuities with no surrender charges. WATCH OUT FOR SHARKS!

EC: want more info on UGMA and investing in your kid’s education: check out this site:
http://www.educationira.com/

Caller #12 Jim: Asked about a quote from the former head of the federal reserve which roughly says, “the fate of the world economy rests on the fate of the U.S. economy, which rests on the fate of the U.S. stock market, which rests on 50 stocks, half of which have no earnings.” Bob doesn’t agree that the U.S. market depends on 50 stocks and he can only think of one major company that has no earnings, Amazon.com. The caller also had a question about a lawsuit he read alleging collusion by the central banks and brokerage houses to drive the price of gold down so they could profit on their short position. Bob said it didn’t make sense to him.

Caller #13 Paul: Wants to know if it s a good idea to borrow money from his brokerage margin account to pay for a bridge loan to purchase a house. Bob noted that the interest you borrow on a margin account is only tax deductible to the extent you earn investment income. This caller did have investment income, so Bob said he was ok with it since the loan was only for 6 weeks and the caller had plenty of money/stocks in a diversified portfolio. Bob said you always have to be wary of getting a margin call.

Caller # 14 Linda: This caller has $56,000 in cash savings and wants to know if she should put it in a money market account with interest rate of 4.12%. Bob said it was a good idea to keep the cash in a money market account, and she may even be able to get a better rate. Caller was concerned that she would have to pay taxes on the money she earned, but Bob pointed out that she wasn’t going to be taxed 100%, so at least she would make some money!

Caller # 15 Jay: INTERESTING CALL! This caller was angry at the double talk and hypocrisy when people bash the internets. Jay told Bob that he had been bashing AOL, yet none of the analysts have lowered their estimates on that stock, or other internets. The caller thinks many in the media try to scare investors out of the internet stocks. Where is the logic in that if all of the analysts are holding their targets, and all fund managers are buying these stocks. Why shouldn’t AOL reach new highs? Bob’s response was AOL is still trading at 200 times next year earnings, very high! The caller countered with PEs shouldn’t apply or where do you draw the line with PE ratios? Bob said the market multiple right now is about 25 times next year’s earnings with an implicit growth rate of 8% forever. AOL’s multiple has an implicit growth rate of 50% compound annual growth rate forever. The caller said, “Mark my words, AOL will reach a new high (above 175) in the next two months.” Bob then asked the caller what percentage of the caller’s portfolio was in AOL. Caller said 40% was in AOL. Bob told the caller he was in denial. (EC: denial is not a river in Egypt).

Brinker Comment: Bob said he has learned that when he expresses his opinion about high valuations of certain companies, people get mad at him. For example, his comment that Coke was richly valued last year made some of his listeners angry.

Caller # 16 Neal: This caller asked Bob how he rates buy and hold strategies vs. market timing and how does his market timing model predict the bottom of the market. Bob says he does not do short term market timing. However, picking bottoms (pardon the expression) is the easy part. The ability to call major market tops is exceedingly difficult. Bob pointed out that his market timing has been to stay 100% invested during the entire bull market run.

Caller # 17 Roger: Roger wanted to know about the theory of over-saving. Bob says that is when people have a mentality that they have to keep holding their assets and never spend. You are at that point when you have more money than you can ever spend, then you are over saving. (EC: don’t I wish).

Caller # 18 Frank: This caller has $100,000 in market. Seventy-five percent of his portfolio are in three stocks: Microsoft, AOL and Cisco. Bob says there is a difference between these stocks in that Microsoft has a PE much more realistic than AOL. Microsoft has a little over 50 times next year earnings; AOL is over 200 times next year earnings. Bob says he doesn't think it makes sense to have more than 4% in an individual stock, unless you work for that company, or special other circumstances apply. Bob gave an example of stock mania in the past. One of the hottest stocks in the late 60s, was nursing home stocks. People piled into those stocks. The hottest stock was called Four Seasons Nursing. That stock went up to 180 per share, then went down to one dollar per share. Bob said he doesn’t think that will happen to stocks like Microsoft or Cisco. Internet stocks, however, are a different story, with the multiples in 100s. Bob says its one thing for a mutual fund to have holdings in internet stocks, because its a small percentage of a portfolio. Bob’s recommendation to the caller is to make a sideways move from AOL into the stock market index.

Brinker Comment: Bob notes that a lot of callers have a high percentage of portfolios in individual stocks, particularly AOL. Bob is surprised that investors are willing to accept the extraordinary volatility and PEs in these stocks. These are cult stocks.

Caller # 19 Bob: This call discussed the history of the fractional reserve banking system. Beginning in 13th century England, people deposited their gold with the goldsmith because they didn’t want people to steal it. The goldsmith gave them a receipt that was “as good as gold.” The goldsmith realized that not everyone came back at the same time to redeem gold, so he was able to loan out the other 90% fort interest and this became the basis for banking and lending. Bob says this is securities lending today. Bob asked whether if you had 20 girlfriends, the same principle could apply. (ha ha Bob).

Brinker Comment: This goes on with brokers lending out on people’s securities. By doing that, they are in position to generate additional revenues

Caller #20 Carolyn: This caller has most of her IRA in Putnam Mutual Funds. The longer she keeps them, the less commission she pays. She has started transferring her IRA to Vanguard after listening to Bob. She has the growth & income fund,new opportunities and voyager 1. She owns some A and some B shares. Bob noted that three year performance for the funds was 68%, 53% and 69%, respectively. Bob noted those funds are under performing the major market indexes. Bob recommends the total stock market index.

Caller #21 Graham: This caller purchased Teradyne and Novellus in the $20s. They are both much higher now. The caller wants to know at what point in time is the valuation two high for them. Bob said they are not raging buys anymore. The big thing with these stocks is the fundamental outlook in the industry that years 2000 and 2001 have huge potential. Investors should remain optimistic and should hold the stocks, but continue to expect them to jump around. Its hard to say what PE parameter these stocks should be. Key things are industry recovery and the move to the 300 millimeter chip. From Bob’s point of view, these stocks are outstanding and should be held at this time. Caller also asked about Abby Joseph Cohen’s recent comments on the market. Bob says Abby has done a good job and has become more cautious. Bob says the market is richly priced, but that should be obvious to everyone.

Caller # 22 Barbara: Question about investing in foreign markets. Bob recommends that 25% of the portfolio be outside the United States, consisting of 10% in Europe, 15% international position. This caller was looking at Vanguard International and Global. Bob likes the international fund because that puts you in a lot of countries outside U.S. Make sure you check the fund’s weighting in Japan, which he doesn’t like a lot. The key is getting 25% of the portfolio in a quality international fund. When you are in a global fund, that includes the U.S. and could be redundant. Would not lump sum now, but would dollar cost average into international fund.

Closing Comments from Brinker: A plug for his fund raiser in Illinois for Volunteers of America, aiding underprivileged children. The event will take place on Saturday, August 7th. Bob will update his view on the outlook of the stock market, interest rates, etc. Can get tickets by calling (312) 559-1212. Can also get them on the Brinker web site. www.Bobbrinker.com. EC: You already know that web site!

FINAL THOUGHTS FROM DAVID K a/k/a David Korn. Hope you enjoyed this summary that took me even longer than before! If you want to get on my e-mail list and have my summaries e-mailed to you directly, drop me a line at the following: davidk555@earthlink.net.

-- posted by David_Korn

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