Moneytalk Bob Brinker Summaries - Information ONLY

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Top 295. Jul 11, 1999 1:31 AM

» David_Korn - Summary of Bob Brinker's Moneytalk July 10, 1999

Summary and Interpretation of
Bob Brinker’s Moneytalk Radio Broadcast
for Saturday, July 10, 1999
by David K. (E-MAIL: davidk555@earthlink.net)

Opening Monologue: Bob opened his show by discussing the fact that the market reached all time new historic closing highs in the Dow, S&P500 and Nasdaq. (Bob correctly predicted that we would reach closing highs sometime this summer). In fact, yesterday was the second Friday in which they all reached closing highs. The current leg of this bull market began in October,1990, when the Dow was at 2365. There have been a few short term corrections of 10% or less and one intermediate term correction of 19%. A favorable outlook for the U.S. economy is what is fueling this bull. Bob’s market timing model has helped keep us fully invested. Other things that are fueling this market is that the Federal Reserve talks tough but only carries a tiny stick. Their stick amounts to a .25% increase in rates put into effect at the beginning of July. We call it the federal reserve “open mouth” policy. What is important is what the Federal Reserve does, not what they say. What they have done is to expand the money supply at a rate sufficient to justify sustained economic growth. We have favorable vibes out of the timing model’s monetary indicators which has helped keep us fully invested all the way through. However, Bob’s timing model sentiment indicators don’t look so hot. There is a high level of complacency in the market. Moreover, valuations are the highest the market has ever known. The S&P 500 is trading at 28 times estimated 1999 earnings with the year only half over. This is an all time record historic high multiple! We are facing investor nirvana. This type of nirvana will breed complacency and high valuations and we will need to watch these factors as well as the federal reserve and the market in general.

Bob noted that since the market reached all time new highs, he did a total reevaluation of his timing model. The result? The timing model now says: (1) be vigilant; (2) stay close to the indicators; and, (3) stay the course. (i.e. stay fully invested).

One area of the market which is not participating in all time highs is the internet group. Bob checked how far off their highs many of these stocks were. For example, Onsale down 80%, Ubid frown 82% Market Watch down 57%, Ivillege down 53%, Amazon down 43%, Ebay down 42%, Priceline.com & Yhoo down 34%, Broadcast.com and RealNetworks down 30%, and even American Online down 27%. What is significant about these declines is that they remain in place despite the fact that all the major indexes have reached all time highs.

Caller # 1 Paul: This caller wanted to know how the Federal Reserve (“FR”) can slow down or speed up the rate of the growth in the M-2, M-3 money supply other than by changing the short term interest rates. Bob said the FR has a number of procedures that allow it to control the growth rate of the monetary aggregates. One of the most commonly used processes that the FR central bankers implement is the purchase and sale of securities from the FR portfolio into the open market. For example, if the FR is purchasing treasury securities in the open market, than they must pay for those securities upon settlement. Upon settlement, the FR than transfers the proceeds of those treasury securities transactions into the bank. The bank then becomes more flush with liquidity as a result of that transaction. On the other hand, the FR can also take money out of the monetary aggregates by going on a campaigning of selling securities which then must be paid for out of the banking system. The caller than asks if that would have an effect on the treasury interest rate. Bob said yes, but the treasury market is so liquid, it would be a minor effect on the price. The major effect of these transactions would be on the monetary aggregate.

Editorial Comment, hereinafter “EC” : If you are really bored, and you have no life (present company excluded), and crave more info on the Federal Reserve and all of their easy to understand regulations, check out the following web site which offers extensive material about the Federal Reserve Board

http://www.bog.frb.fed.us

Caller #2 Ken: This caller wanted to know Bob’s view of the long term future of the market in view of the baby boomers retiring in the future and there being more supply than demand for stock if all of the baby boomers all cash out on their retirement funds. Bob said he thinks there is a possibility that sometime beginning in 2010 or later, you could see significant liquidation of stocks in order to provide cash flow for retiring baby boomers. Bob said there needs to be more study done in that area. Nevertheless, Bob thinks it is too premature to worry about it because there is nothing you can do at this time even if it turns out to be a significant event. This caller is overweighted in Europe and wants to know Bob’s input on the European market in view of the price fluctuations of the Euro. Bob recommends that 25% of the portfolio be outside the United States, consisting of 10% in Europe, 15% international position. Bob noted that the 15% international position will also include European companies. But Bob did say he thought the best value in the international arena is in Europe. One problem is that value is a wonderful thing, but only when it is recognized in the market. Bob said the question is what will the catalyst be to move investment monies into that market place.

Brinker Comment: The U.S. market has led the way of the major markets in the world. If you look at the U.S. vs. European theater,U.S. wins. The S&P500 up 14.9% year to date. The total stock market over 14%. The Small Cap Index is up 11.1%. The international arena, with the exception of rebounding markets in far east , have had slow growth. So, if you are doing investing in the international markets you are doing it it he context of asset allocation and risk reduction as opposed to trying to catch a huge run.

The Europe markets have done better in local currencies than in the U.S. dollar. The Euro has had a difficult time. It has only been six months plus since those eleven European country markets adopted the Euro as their new single currency. It was at a $1.18 in early January, now it is just above $1. The currency factor has played a role in European returns year to date.

EC: If you still haven’t quite figured out that the “Euro” is not a simply an abbreviation of the word Europe, you need to do some learning. Check out this site on the web to learn more than you ever wanted to know about the Euro:

http://www.ispo.cec.be/y2keuro/euroit.htm

Caller #3 Ralph: This caller wanted to know if the market was going to be more shaky since we never had the significant correction of 10-15%. Bob said he did say that if Market had 10-15% correction, that would significantly increase the potential of major upside. That didn’t happen. We had 6% correction in Dow and S&P, and 10% Nasdaq which has allowed us to get to all time new high grounds. In October, 1998, for example, we predicted incredible upside which has happened. Absent a 10-15% correction, we could not predict a huge upside and in fact, we haven’t had huge upside, just new highs but not by much. We are facing headwinds of uncertainty , high valuations and concerns about inflation if the world wide economy brings demand and interest rates up. If we had a 10-15% correction, it may have been possible to predict high levels of upside. We were able to predict new highs and to remain fully invested, but not come out and join the euphoria of the bizarre forecasts of how high the market could go this year. The caller then asked if Bob could foresee a buying opportunity coming up this year? Bob noted that we have not had a major buying opportunity in 1999, and whether we will have one down the road, we will need to give the indicators time to speak.

Caller #4 Lou: This caller wanted to know Bob’s opinion on Canada’s Newbridge Network’s Corp.’s (Toronto: NNC.TO) acquisition of Stanford Telecom (STII). (EC: Bob recommended purchase of STII several years ago on the Nightly Business Report). Bob noted that he had recommended purchase of STII because of the value of their technology portfolio and was an outstanding play on broad band wireless and felt that the stock was underpriced in the market. Newbridge apparently agreed and bought them out. (Bob does not follow Newbridge Network). Bob thinks it is a great buy for Newbridge and a windfall for Stanford Telecom’s shareholders. The caller than wanted to know about Ultratech Stepper, Inc. (UTEK) and said the stock has been diving since he bout it at $32. Bob said the stock has been relatively stable lately in the low teen range. (Current stock price is $15). Bob said he recommended it initially when the stock was in the 20s and if it is only 4% of portfolio what is the big deal? Bob said Utek has a book value of close to $10 per share and cash value at close to $7 per share and Utek is looking to become profitable by the fourth quarter of this year and hopefully a profit next year. Utek is a company that is a small cap stock that has gone through down turn along with a lot of small caps in the industry. Bob said when you are talking about a small cap stock like this, first you put only 4% into this kind of stock and determine if you have tolerance for risk in this type of stock which can go down.

Brinker Comment: There are investors that are unhappy unless every single investment they make turns into a winner. Investing is about putting together a portfolio of securities that on balance will generate a good rate of return for you. If you ever are going to purchase an individual stock and only expect a win, you shouldn’t be in the stock market. Look at people who bought Apple at $72 a share 10 years ago while their stock plummeted. Bob picked Stanford Telecom which took a long time. It floundered around 12-15 per share for months, years. Now, someone saw the value and bought them out. Stanford is now trading close to $30 share now.

Caller # 5 Charles: This caller’s first question was about a stock that was being called for $50 per share but is being traded on the exchanges for $70. Bob sad he didn’t know enough about the company or the transaction to comment. Bob did recommend that he consult the ValueLine investment survey on that company. (EC: Check out Value Line’s web site at: http://www.valueline.com).

The second question by the caller seriously irritated Bob. The caller said Bob made a comment about Janus Mercury and Olympus funds being on the downside. Here is the fact. Bob has been recommending Janus Olympus as one of his favorite funds. The fund is up 31.8% year to date. He has recommending fund for a long time. Bob doesn’t follow the Mercury fund from Janus.

Brinker Comment: Bob apologized for overreacting to caller’s mistake at misquoting Bob on his view on the Olympus fund. Bob is frustrated when people misquote him given that he has recommended that fund on the radio and in his newsletter. (In the words of James Cramer, this caller was just plane WRONG!)

EC: Want to buy the Janus Olympus fund, check out the Janus Funds web site:

http://ww4.janus.com/welcome/welcome_nos...

Brinker Comment: The news broke this week that Republican Senator William Roth
of Delaware urging income tax cut. 792 Billion dollar ten-year tax cut. Greenspan is probably not happy with this proposal since a tax cut could accelerate growth. Bob noted that there is unlikely chance of the Republican’s tax cut proposal being signed into law by Clinton. One of the provisions of the proposal is to lower the federal income tax rate from 15 to 14% for those in that bracket and to expand expand contributions to IRAs and 401ks and to get rid of marriage penalty (which Bob noted is a national disgrace). How much are we talking? $450 annually for a family of 4 making 55,000 a year. Or, $250, for a single tax payer making about $30,000 a year. This would put more money into U.S. economy. That would not be helpful. In boom times like this they don’t make economic sense. In addition, we have a 5 1/2 trillion dollar national debt. Also, the Social Security trust fund has been raided for years. It would make more sense to put some of that money into the SS trust fund. Right now the income tax is 15% on adjusted gross income up to $25,750 for singles and up to 43,050 for married couples filing jointly. They are also talking about reducing capitol gains tax, but there is not much support in white house for that. What it really looks like is political football on the way in anticipation of year 2000 general election.

Bob also referenced a New York Times article on July 10th about the GOP’s efforts to prevent Hillary Clinton from being elected. “let’s rid our nation once and for all of Bill and Hillary Clinton. We must get them out of our lives and into the Democratic scrapbooks forever.” This was part of a fund raising effort to battle Hillary.

Caller # 6 Julie: This caller just got some money and is at a lost as to how to get started in their financial planning and is considering getting advice from a financial planner. Bob says if integrity is your objective, then deal with a “fee only” person who will not sell products for commission purposes and will only accept fee in return for advice.

Caller #7 Charles: This caller is 45 years old. He and wife have $1.4 million allocated in 75% U.S. Stocks and 25% in U.S. Bonds. Bob was ok with his allocation but noted that of his 75% in stocks, he was not in conformance with Bob’s recommendation of 25% of the portfolio being outside the United States, consisting of 10% in Europe and 15% in an international position. Bob said he found good value in European market and would feel comfortable there. We have a 10% dedication to Europe and some of the 15% international includes Europe. Bob says with the S&P500 at 28 times 1999 earnings, he would not have all his money in the U.S. market. Is this a good time to allocate into the international arena? Bob said most people that listen to the program are already there. With respect to new money, if someone has all their money in.S. and wishes to to diversify overseas, he would consider that a sideways move and lump sum invest it into those markets. For a new investor, Bob would suggest dollar cost averaging into those markets. Bob said that other markets can do well relative to the U.S. We have a PE multiple problem in the U.S. market. The market multiple in U.S. has quadrupled in the last 25 years. On a valuation basis, the best value is in Europe.

Caller # 8 Joe: This caller and his wife are 52 years old. Last year they had a $100,000 IRA that they needed to roll-over. SHARK ATTACK! They went to a broker who took the $100,000 and put it into 4 funds; two bond funds and 2 stock funds. The two bond funds he put into junk bond funds which have grown in total about 1.2% for a 12 month period. He ended up paying about 5% in expenses. fees and commissions. One was the Fidelity Advisers High Yield Fund Class T. Bob said why would you ever put IRA money into a junk bond fund? The other bond fund was the Selgman High Yield Fund. Bob said expenses for those funds is over 6% and the fund is down in value over the last 12 month period. Bob said these were totally inappropriate funds for the broker to recommend. The other recommendation was Fidelity Growth Opportunity Fund Class T. Expenses on this include up front sales charge of 3.5% and 1.4% annual expense. The fund went up 18.6% for the year, but still lagged behind the S&P500 index and the Total Stock Market index, both of which have no managers. Bob couldn’t locate the remaining fund which was a big loser.
Bob told this caller that he needed to educate himself and recommended vanguard.com and bobbrinker.com both of which have lots of recommended reading lists. Additionally, stay away from this broker, he is your worst enemy. Bob then defined junk bonds are bonds issued by companies that have lousy ratings by Moody’s, Standard and Poors, and they have lousy ratings because of their financial.

Brinker Comment: Bob said its depressing what he hears is happening out there when people get taken by their brokers. What can you do? Before you spend a dime, educate yourself. Also, look at the July 5th edition of Barrons mutual fund report. Compare the mutual funds to index funds. The quarterly edition of Barrons dated July 5th has thousands of mutual funds covered. You can check it out from the library.
You don’t put your IRA money in junk bonds. If you are going to speculate in junk bonds, don’t do it in your IRA. That is important long term retirement money

Caller # 9 Chris: Over the years, his wife and he put money into mutual funds. Is it appropriate if Bob gives a bear market signal, to transfer funds to Ginnie Mae funds or money market funds because wouldn’t the fund managers also get out of the market if Bob issued a bear market sell signal? Bob said if his timing model goes bearish, the community of mutual funds managers won’t care. With respect to index funds, those funds must essentially stay fully invested according to their own guidelines.
The caller than said what about my funds in the taxable accounts? Bob says its better to take your profits and pay taxes, then have no taxes but no profits! Bob also said there are ways to hedge your position as he has discussed on previous programs.

Brinker Comment: A lot of people were shocked about the proposal from the white house to put more money into the purchase of prescription drugs for senior citizens. Is this a direction we want the country to go? Bob don’t think so. Clinton said nothing about people who don’t have health insurance. Bob says his show has never advocated that government provide health care insurance for nothing. Do we really want our senior citizens to be taking more drugs? Do we want our government regulating this? Bob said what was strange about the President’s proposal was the relative importance of providing prescription drugs vs. addressing the issue of people with no health care.

Caller #12 Patrick: This caller wanted to know what the default rate might be on investment grade bonds. The caller has large IRA portfolio of fixed income consisting of 1/3 in treasuries and 1/3 in investment grade preferred stock and 1/3 in investment grade bonds. Over the years, he has heard him recommend for the preferred stock a sinking fund. The caller has used large cap companies. Bob said the default rate for treasuries is zero by definition, and the default rate for investment grade bonds is minimal. Caller wanted to know if he should be concerned if he has a sinking fund. Bob said sinking fund can reduce the duration of the preferred thereby reducing your exposure to long term interest rate risk. If you do own perpetual preferreds -- that is without sinking funds or retirement dates-- what that means is you have the longest possible maturities which would be infinity.

EC: Bond Sinking Funds are a special fund to be used to retire bonds at maturity. Normally, period cash contributions are made to the fund. Usually reported on the balance sheet as a non-current asset

Brinker Comment: With the Dow, S&P500 and Nasdaq at all time historic highs, we need to be very watchful. We should be aware of the high multiples and all of the factors that could lead to a turn in the market. Bob said that he is surprised at how many times callers ask whether Y2K is going to be the end of the world; on the other hand, very few callers ever ask about how long the high valuations can last. Bob noted you hardly ever get those calls . Either callers don’t recognize the importance of valuations, or they don’t care about valuations. Are they aware that twenty five years ago the S&P was 7 times earnings!

At this time, in Bob’s opinion, we are not at risk at a bear market (as of this weekend). But you don’t have to be a brain surgeon to know that if the PE multiple went from 28 to 19, which would still be above the historical norm, the market would lose 3700 Dow points. No one pays any attention to this stuff. It reminds him of the internet valuations before the meltdown. Remember Bob’s favorite caller, Tony, who gave Bob flack because Bob was screaming about the high valuations of YHOO, AMZN and AOL. Tony said it doesn’t matter what you pay for an internet stock - you have to own them!!!!!. Well, Tony was wrong.

Caller #13 Stacy: This caller is a 59 year old new listener and self-employed. She will net $100,000 in real estate properties. She has a $85,000 mortgage at a rate of 7%. She has no other bills and has income of $30-40,000. Should she pay off the mortgage or invest? She has low tolerance for risk and has no knowledge of stock market. Bob says take a look at the Vanguard Ginnie Maes. The fund is extremely attractive at this value and is an excellent idea for a conservative investor like her. If you take the $100,000 and put it in Ginnie Mae and get about 6.7% which will fluctuate. Its a wash compared to the interest rate on the mortgage. The money would come in as income and it would be offset by mortgage, but she retains her liquidity, she can access it if she needs it. (There was then a discussion about how great Las Vegas is and Bob agreed).

EC: Interested in purchasing Gennie Mae Funds or learning about them? See their web site at the following address:

http://www.Ginnie Mae.gov

Caller # 14 Kurt: This caller wanted to know if there is any value and what the risk is to dollar cost averaging out of the market? Bob says if you take the “total return” approach to investing, you are actually doing that. For example, if you make a decision that you have a stock portfolio and you are going to take 6-7% out annually from your portfolio- you might only be getting 1-2% in dividends. So what that is doing is really dollar cost averaging out of the market. Bob thinks there is merit to total return investing.

Caller # 15 Eddie: This caller asked what happens when you buy a mutual fund and the fund manager sells shares and there is a capital gains because of a profit, if he redeems the fund later at a profit, can he subtract out those capitol gains for tax purposes? Bob said that all of the distributions that are paid in the form of dividends, including capitol gains distributions , or investment income distributions, all of those distributions are added back in to what you paid for the shares when you figure your cost basis. For example, you buy a fund at the beginning of the year for $10 per share. At the end of the year, the fund is $12 a share. During the year, they pay you a $2 distribution which will be taxed to you. At that point, you are in a position to increase your cost basis so that you won’t be double taxed. The caller then asked if it is true that when the value of the Ginnie Mae goes down, the income payments go up? Yes. Bob said that in general, with Ginnie Maes you get more than you would get with treasuries, but with more price fluctuation.

Brinker Comment: In the semiconductor business, Semicon is the biggest annual trade show and begins on Monday in California. During the trade show, there will be a chip equipment sales increase in 1999 of 9%. Year 2000 is projected to be 18% increase. Year 2001, expected to be 22% increase. Tremendous sales growth in the next few years. One thing helping those companies is the Interest and telecommunications growth. This is an industry that went through downturn during 1990s. Many of the large cap semiconductor capitol equipment stocks have tripled since last fall.

Caller # 16 Craig: This caller grows corn and soybeans. Much of the rest of commodities are in the dumps, whether it be oil or mining or farming. What type of monetary policy would have to take place to bring us up to the rest of the economy? Bob said he doesn’t think its a monetary policy issue. We have had rapid growth in monetary aggregates in recent years. Your in a business that is an international supply and demand business. He thinks one of the obvious issues is international competition. There is not enough demand to drive up prices because there is a great supply. The caller than said that one of the things he is consistently told is that the value of the American dollar is so high that it makes their exports non-competitive. Bob said no question that a strong dollar makes U.S. products abroad less competitive. Caller said Is there anyway to change that without effecting everyone else? Bob said they could, but they won’t knock the dollar down. That would make American products more competitive overseas. The downside is that if they knocked the dollar down, foreign capitol would flee the U.S. markets.

Caller # 17 Gerry: This caller wanted to take advantage of the tight labor market and move. Is there a set of conditions were it is more advantages to rent a house versus buying a house. Yes, if it is a short term residency, even a year or two. Why? Because you get involved with a lot of expenses that are hard to justify in the short term residency, not the least of which could be a 6-7% real estate commission.

Caller # 18 Steve: 27 year old newlywed and came across $20,000 from gifts. No debt, and not sure of buying house yet. Bob said its seed money and would put it in a money market fund, such as the Vanguard Prime Money Market fund. The yield is about 4.75% and you can get check writing privileges on it.

Closing Comments from Brinker: Those of us who have been fortunate to live in the decades of the 1990s have been blessed with an incredible market. No one thought we would have seen such rises in the markets. One of the drivers is growing earnings. More importantly, the driving force is rising price earnings multiples. Investors are simply more willing to pay more for future earnings. A dollar of earnings in 1974 only traded at seven times or $7. Now, a dollar of earnings trades at $28.

FINAL THOUGHTS FROM DAVID K a/k/a David Korn. This is the first time I e-mailed my summary out. If you already sent me your e-mail address, you should receive a copy of this summary in your e-mail. If you don’t, that means you never sent me your e-mail. Remember, simply posting your e-mail on a site won’t cut it -- there are just too many for me to handle. However, the remedy is easy. Simply drop me a line via e-mail at the following:
davidk555@earthlink.net

Other References
Moneytalk Radio Show : 1-800-934-2221
Bob Brinker’s Web Site: http://www.bobbrinker.com.
Other Sites Discussing Bob’s Show (Suite 101.com):
http://www.suite101.com/discussion.cfm/i...

-- posted by David_Korn

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