Moneytalk Bob Brinker Summaries - Information ONLY

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Top 310. Jul 18, 1999 11:48 AM

» David_Korn - Summary and Interpretation of Moneytalk for July 17, 1999

Summary and Interpretation of
Bob Brinker’s Moneytalk Radio Broadcast
for Saturday, July 17, 1999
by David K.

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Opening Monologue: Amidst breaking news about John Kennedy Jr.’s possible plane crash, we send out our thoughts and prayers to the Kennedy & Bessette families.

Bob opened his show by referring to the ongoing prosperity in the U.S. markets with a direct if not pretty statement: “What can you say about the mother of all bull markets!” If you look at the Dow at 11209, and you go back less than 9 years ago to October,1990, the Dow was at 2365. We have a 374% increase in the Dow without even counting the dividends or the effect of compound annual rate of returns. Perhaps the most dramatic thing is the change in the valuation metric. People today seem happy to pay 28 times estimated 1999 earnings for the S&P500. Whereas, 25 years ago in 1974, the S&P500 Price Earning multiple was only 7.3. That means that the multiple (the price that investors are willing to pay for $1 of corporate of earnings) has risen 300% in the last 25 years. This has happened because a number of secular factors have fallen into place, not the least of which is inflation. Inflation is the key number that you want to know going forward when you are trying to make a valuation approximation for the stock market. It appeared to be good news when the Labor Department on Thursday, announced that that for the second consecutive month, the consumer price index came in at zero. This is the first time we have had two consecutive months of zero inflation since the end of 1992.

Also, if you want to throw out the volatile food and energy components, you could look at the “core” rate of inflation which was up just .1% in June which is the same as May. Thus, there really is no evident inflation in the U.S. economy. Cause for celebration? Perhaps, but not if you are Bob Brinker, market watchdog!

Reality may be different. When you look ahead, you must consider the Columbia University Index of Inflation. According to that index, the rate of change in the inflation indicators has reached its highest number in many years. That number is 6.8%. We have had four consecutive rises in this index. Bob believes that this is the index that Chairman Greenspan a/k/a Chairman Greenshades studies the hardest. Greenspan’s primary hobby (other than his wife Andrea) is putting on his green shades, rolling up his green sleeves and studying charts of economic indicators, turning the pages with his green thumb until he turns green in the face. (sorry, I got carried away with the green motif). While everyone is dancing in the streets over low inflation, Greenspan could be thinking differently -- especially if he puts a lot of weight in the Columbia Index. The federal reserve board could raise interest rates at the next meeting of the federal reserve open market committee (mid-August). Remember, watch what the Federal Reserve Chairman does, not what he says. At the last meeting, they said they were becoming neutral on future rate changes; however, at that time, the Fed Chairman raised rates .25%. Will he do it again, stay tuned!

Caller #1 Karen: This 59 year old received $700,000 in an IRA as part of a divorce settlement with no tax consequences. Her net worth is about $1,300,000. She already has about $300,000 equity in her house. The remaining amount of her money is in stocks, including the IRA which is invested in stock mutual funds. Bob thinks that given her age, her asset allocation is off. Bob recommends that for people in the 40-59 year age bracket, an equity ratio that makes sense ranges on the low side of 60% stocks to a high side of 75% stocks. The caller is interested in changing her asset allocation and is being counseled by a financial planner. Look out, possible SHARK ATTACK! Bob gave her two examples of shark attack victims., Example number 1, people with IRAs are told by an advisor to put that money in an annuity. Stupid! Putting IRA money in an annuity is redundant because an IRA is already taxed deferred out until retirement. Similarly, an annuity account is tax deferred to retirement. Second example, caller is told to put money in mutual funds with huge commissions that eat into profits. Bob recommends that (1) she doesn’t do anything with the money until she has knowledge to know what she is doing; (2) learn by going to two web sites: bobbrinker.com and vanguard.com; and, (3) she pay particular attention to the mutual fund education alliance. The caller then asked if Bob thought it would be more advantages to opening her IRA with Vanguard versus keeping it with a broker. Short quiz folks, what do you think Bob’s answer was? The answer is yes!

Brinker Comment: Bob remembers seeing a sign on the wall which said basically, “when you reach no decision, you have made a decision.” Bob says the decision not to invest until you have educated yourself is a great decision.

Editorial Comment, hereinafter “EC”: Is Bob going Buddhist! That sounds like a proverb with its origins in the far East! Think I am making this stuff up! Check out these two random sites for some great proverbs on the web:

http://www.tokujo.ac.jp/Tanaka/WWW97/Hel...
http://www.chesco.com/~artman/chinese.ht...

Caller #2 Rob: This 40 year old caller has $9,000 in index funds, $5000 in Vanguard Index 500, and some monies in mutual funds in 401(k) and Roth IRA as well as some money market monies. Rob now wants to get into some individual stocks and IPOs! Bob said he should not speculate in initial public offerings, especially when the market is at all time record valuations. Bob recommends continuing to add to index fund investments.

Caller #3 Alan: This caller wanted to know if the rapid nature of the new record highs in the market decreases the visibility of the market looking forward. Bob says it creates a situation where you have to eat drink and sleep with the indicators. We are at such lofty levels of valuation that the market is priced to perfection. We have zero tolerance for rising rates, rising inflation,an economy that grows to fast and zero tolerance for international crises. There is simply no tolerance for anything going wrong. Today, we face extremely low put/call ratio and very high level of bullishness in advisors. When the indicators change, we will change. Question: Is the only way for the multiple to increase is for earnings to be better then expected? Bob says no that will not increase the multiple. The only way to increase the multiple is to have lower interest rates. Without lower rates, the market will fly into a headwind of lofty evaluations. Good earnings are already expected and they probably will come in good. Therefore, earnings will probably be a non-event in terms of Price to Earning multiples.

Brinker Comment: Bob says that it is amazing to witness those who say the market won’t come down substantially because we are in a new paradigm of the market. Bob made a great point. Today’s euphoria seems like the mirror image of what the mood was in 1974. At that time, the Dow was at the 600 level and everyone said the stock market was dead. It was all over the news -- don‘t invest in stocks. Now, we have mirror image - people expect to make 30% a year in the stock market.

EC: I don’t know about you, but I feel like another proverb. How about this Chinese proverb: “To guess is cheap. To guess wrong is expensive.”

Caller #4 Luke: This 35 year old caller praised Bob for his great recommendation on the semi-conductor capital equipment stocks in October, 1998. (At that time, Bob recommended dollar cost averaging into stocks like Novellus, Teradyne and Applied Materials). The caller wanted Bob’s opinion on the percentage of the weighting of technology and financial stocks in a portfolio. Bob said he would regard the technology area as one of his favorite areas of the market. Likewise, the financial sector is a great area. In terms of percentage weighing. Bob noted that the S&P500 is about 20% technology stocks. Given the caller’s youth, Bob thought it would be all right for the caller to overweight technology by about 25-30%. It would also be good to diversify and not have more than 4% in any individual stock. Bob said the 4% rule applies to a person’s entire portfolio, including retirement and non-retirement savings.

The caller then stated that he was being patient on UTEK and observed that Bob had been hammered about his pick on that stock (ain’t that the truth!) but he was going to stay the course and hold the stock. The caller then asked where you could get a 15% rate of return outside of the stock market. Bob said the only place to make 15% rate of return outside of stock market would be to take tax deferred money in an IRA and invest in zero coupon treasuries. If and only if interest rates decline, you might be able to make that kind of rate of return. However, the jury is out on whether there will be a material decline for interest rates. Bob’s current projection for rates is between 5.5% and 6.25% and we are right in the middle of that range.

Caller #5 Chris: This 48 year old caller has a net worth of close to 3 million. He has $1,766,000 in stock account but $853,000 in margin balance (about 50% margin). What is this guy doing! Bob said this is a no brainer. Pay off the margin balance on Monday morning. Way to much risk to borrow this much money at the valuations in the market at this juncture. He doesn’t need this margin.

Caller #6 John : This 66 year old caller is four years from retirement and has about $1 million net worth, but is facing some health problems and doesn’t know how long he will be around. (EC: if you are reading this, I hope you stay a long time). The caller has about about 70% stock and 30% bond funds. Bob says that is pretty aggressive and he would be more comfortable with the caller being about 50-60% in stocks.

Brinker Comment: The Consumer Price Index (“CPI”) was released late this week. It is a critical number in terms of what is going on in valuations of stocks and bonds; particularly, inflation going forward. We don’t have much information about inflation going forward other than the CIBCR Index. The CPI is released by the U.S. Dept. of Labor on a monthly basis. We also have a break down of major urban centers. The national rate of inflation over the last 12 months is 2.0%. It is surprising to note that in San Francisco area, which incorporates Silicon Valley, San Jose and Oakland, the CPI for the last twelve months has risen 3.8%. This means that inflation in the Bay area has been almost double the national average. Coming in second place is Seattle which has a rate of 3.1%. The only other area in the vicinity of 3% is Detroit which is 2.8%. Philadelphia is 2.4%. New York is 2.1%. Los Angeles is 2.0%. Chicago and Atlanta are 1.7%. Miami is low at 0.7%. San Franciso and Seattle have had great real estate markets which probably contributes to those high numbers.

Other than the monthly CPI numbers, we also get quarterly reports in the Gross Domestic Product (“GDP”) numbers. The GDP number has been benign. The GDP inflation number for 1998 calendar year was 1.0 - one of the lowest on record. The first quarter of 1999 was 1.4, slightly higher. Bob thinks the GDP number is a better measure of inflation than the CPI because the CPI has between .5-.75 percentage points of fluff built into it. When Bob looks at that number, he makes an unofficial adjustment in his own mind that it is probably overstated by at least .5%. The GDP price index tends to be highly accurate.

Therefore, if you are looking at inflation right now, you would say that the range on inflation looking forward from here would be in a broad range of 1.5-2.0% (Bob said 1.5-2.0, but I think he meant 2.5?) or possibly in a narrower range of 2.0-2.5% over the next 12 months. If that is true, its because of the extraordinary tight labor markets.

EC: The CPI represents changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, and life insurance) are not included.

Did you know that the CPI is also used as a means for adjusting income payments. Over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI. The index affects the income of almost 80 million people as a result of statutory action: 47.8 million Social Security beneficiaries, about 4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients. Changes in the CPI also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private firms and individuals use the CPI to keep rents, royalties, alimony payments and child support payments in line with changing prices. Since 1985, the CPI has been used to adjust the Federal income tax structure to prevent inflation-induced increases in taxes. To learn all you ever wanted to know about the CPI, go to the following web site (I recommend starting with the overview section):

http://stats.bls.gov/cpihome.htm

Caller #7 John: This caller wanted to know why the banks are selling huge quantities of gold. Bob said they are doing it because the thesis of holding gold in your vault has disintegrated as the price of gold has collapsed. This asset in the early 1980s was at $800 an ounce and now it is in the mid-200s. The banks are saying we have lost about 70% off the highs and we are not even earning interest off it. The irony is they waited so long. Bob has been bearish on gold since 1981. Furthermore, they are putting downward pressure on the price by selling so much of it. Bob also observed that the Federal Reserve considers the price of gold in determining rates of inflation.

Caller #8 Rick: This caller and his wife work for government agencies and they have tax deferred compensation plans in 457 Accounts and want to know what to do with them if a bear market signal comes. Bob said you can hedge your position by shorting spiders.

Caller #9 Bob: This caller has 2 kids going to college in the next couple of years and wants to know what he should do with the money they currently have in funds that they want to use for the college tuition. Bob recommends that he keep the money for the first two years in money markets since that money is going to be spent. Bob could live with the other half that wasn’t going to be used for a couple of years in a Ginnie Mae fund. With respect to the other kid going to school in a few years, Bob favors moving the money away from equities, toward fixed income and money markets due to the high valuations of the market.

Caller #10 Jim: This caller wants to put 75% in the total stock market index with Vanguard and 25% in the Vanguard International index. Bob said he should dollar cost average over a 12 month time horizon unless his market timing model changes. This caller wanted to know if it was true that if he kept the money there for 10 years, he couldn’t lose. (EC: that about sums up today’s investor viewpoint!) Bob’s response was that if price earnings stay at 28 times earnings, and earnings continue to grow at 7-8% a year, then by definition, he could make 8-9% a year including dividends in S&P500, ASSUMING multiples stayed at their current record and earnings continued their growth rate (which Bob said would be quite remarkable). The problem is lower price earning ratios could change that entire equation.

Caller #11 : This caller has a stock which was subject to a friendly takeover attempt which doubled stock. The transaction will probably not occur because of other considerations. The caller is about 8 weeks short of holding the stock for a year and wants to get the long term capitol gains rate. Bob said he could short the stock against the box and lock in the current price.

Caller #12 Julie (Deja Vu!): EC: I thought I was losing my mind when I heard this caller. Julie was caller number #6 from July 10th’s show! They must have temporarily ran out of dylithium crystals on the starship moneytalk and inadvertently replayed the tape from last week’s show. Fortunately, the glitch was quickly fixed and Captain Bob didn’t miss a beat!

Caller #13 Carl: This caller has dollar cost averaged and now has $250,000 in one mutual fund, the Fidelity Destiny 2 Fund (front load contractual fund). It has done well, since 1984 but has a load charge of 8.24. Bob initially thought the caller should adjust his portfolio because the load was so high and a front load comes right of the top and reduces your initial investment. However, Bob then pulled out his magic book of fund returns and pointed out to the caller that the fund has a ten year performance through June 30, 1999, of 21%, even after adjusting for load charge! Bob noted that this caller’s fund beat the track record of the Vanguard S&P500 index fund which for the last ten years has a 18.6% compound rate of return. Moreover, the fund has returned 27% in the last three years. Bob concluded that it is a good fund and the caller should stay in it unless the market changes.

EC: As a long time listener to Moneytalk, I must tell you it is very rare for a caller to own a loaded fund that has beat the S&P500. Quite impressive and I say deserves a link to Fidelity’s home page at the following:

www.fidelity.com

Caller #14 David: This 47 year old caller had $500,000 in company’s retirement plan, had a good job and led a relatively conservative life. He just came into 7-8 million dollars of money. (EC: That happens to me every now and then). The caller was pretty coy about how he got the money. Perhaps lottery or lawsuit proceeds? The caller said we would discuss it as if it were an inheritance. He is being led to private bankers who want to assist him in handling money. He heard a radio show like Bob’s (EC: Competitor of Bob’s? Who!) and learned that market timing is important. Bob said the guy or his wife needs to educate himself before he starts making important investment decisions. Bob recommended that they go to school at vanguard.com and bobbrinker.com. Bob also made specific reference to the Mutual Fund Association link and books authored by John Vogle.

Caller #15 Ron: This caller is a 49 year old school teacher and has $200,000 in a teacher’s annuity program all in equities He wants to move some to a bond fund, but Ginnie Mae’s are not available to him, what should he compare it to? Bob said the first thing to do is to find out if the bond funds that are available to him invest in treasuries or corporate securities and second, ask them their average maturity. The Ginnie Mae fund yields 6.6-6.7% and has average maturity of 7 years and you can use that as a bench market. Bob said he has no problem with this guy moving 20% to a bond fund.

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

http://www.ginniemae.gov

Brinker Comment: Bob got a little philosophical and asked how is it possible that we have been blessed with such a bull market. Most notable from 1966-1982, we had 16 years plus where the major indexes did nothing. In January, 1973, the market returned to a little above 1000 to the level where it had been in 1967. Then, in 1982, it returned to the 700 level. Now look what has happened. If you take today’s Dow and evaluate the gains from mid-august 1982, the starting date for the bull market, the return is 1342% not counting dividends. That’s why we echo Bob in saying, “This is the mother of all bull markets!”

Caller #16 Mary: This caller wanted to know about Microsoft and Disney issuing tracking stocks. With regard to Disney, Moneytalk is a program on the ABC network which is part of the Disney company, so Bob has a policy of not commenting on matters relating to Disney. With respect to Microsoft (“MSFT”), it has only been rumored (not officially announced) that MSFT is considering a tracking stock which would be related to the internet holdings of MSFT. There are estimates that the value of the tracking stock could be as high as 50 billion dollars. Note that MSFT has a market capitalization has a 548 billion market capitalization. (Second place is GE and third place is IBM). With regard to the tracking stock, it would track MSFT’s internet holdings and could lead to high valuations for that business. All we know is the Wall Street Journal’s article that reported MSFT is close to issuing a tracking stock. If it did, it would trade. The rumor has already affected the shareholders in that the run up of the stock on Friday (about 5 points) was probably due to this announcement. If MSFT did have a tracking stock, it is possible that shareholders of MSFT would get an interest in it. NOTE: MSFT will report its earnings on Monday. They will certainly have an investor conference call after the earnings report on Monday. If history is a guide, analysts will be questioning MSFT about this during the conference call so we should know more on Monday night.

Brinker Comment: Bob mentioned that he made an initial recommendation to purchase Microsoft in 1990s to buy the stock at a split adjusted price of $2.00 a share. Without any question, Bill Gates has been a huge beneficiary of the stock value and is about to be the first 100 billion dollar man. He is so wealthy, Warren Buffet can’t even shine Bill’s shoes. Microsoft is to report earnings after the close of the market on Monday. Analysts expect 36 cents per share. Bob would expect that Microsoft could exceed the earnings expectation by a few cents. A whisper number on the street is .38 per share. There is also talk on the street that there is stronger than expected sales of MSFT Office 2000 software. MSFT has made a career of conservative profit guidance and then they top the estimates. The current estimate for June 2000 profits is $1.55 per share. The stock is not cheap and is trading at about 60 times fiscal year 2000 earnings. It is only cheap when compared to internet companies. Also, MSFT is competing against AOL which may account in part for AOL’s decline in stock price. MSFT has had a compound annual growth rate of earnings of about 40% over the last decade. MSFT went public at 19 cents per share. (I know what you are thinking, if only I had......)

EC: Did you anyone see that cheesy yet somewhat riveting T.V. movie, “Pirates of Silicon Valley” staring the ER guy and the Breakfast Club guy (who needs real names). I am pretty sure that the movie was totally accurate. Not.

Caller #17 Ron: This caller is a 58 year old retired school teacher and has $200,000 in a teacher’s annuity program all in equities. His net worth is about $750,000. He has two daughters. His financial adviser recommends that he take out a long term care policy and pay 10,000 a year into a life insurance program that will get him about $1.4 million. Bob recommends that he buy a term life insurance policy which will be cheaper. Bob said he may not even need life insurance since the guy has $750,000 which the wife and/or kids will get if he dies. The caller said he was worried about paying federal income tax when he died. Bob told the caller if you have assets above $650,000 he should consider getting a bypass trust with his spouse. With that trust, for up to 1.3 million, the estate tax liability is zero.

EC: Every individual can transfer property worth up to $650,000 during life and/or at death without paying gift or estate tax. A Bypass Trust utilizes the deceased spouse's $650,000 applicable exclusion amount where it would not be utilized if his or her share of the estate were left to the surviving spouse. Bob is discussing the fact that if a married couple's estate exceeds $650,000 in value it is advisable to create a Bypass Trust (or the "B" Trust of an A-B Trust arrangement) rather than have the deceased spouse leave everything to the surviving spouse. In this manner an estate valued at $1.3 million can pass without the payment of estate taxes on either spouse's death, resulting in a net estate tax savings of $258,500.

Caller #18 Kim: This caller was reading investors business daily which listed IPOs and most went of them went up in price. The caller asked why not take some extra money and buy some IPOs. Bob said most individual investors don’t get IPOs because the reality is that the major institutions who do a lot of commission business generally get the lion shares of the IPOs.

Caller #19 Jim: This caller’s mother has the Morgan Stanley Dean Witter High Income Advantage Trust Bond Fund. (Bob joked that the fund name is not long enough!). The caller wondered if it might be a good time to move from that fund to the Ginnie Mae fund. Bob can’t believe that his mother is in a junk bond fund. Bob said that he would seriously consider moving it into the Ginnie Mae fund. He will get a lower yield, but a safer investment.

EC: when it gets late in the show, Bob sometimes gets a little punchy which makes for amusing moments. Bob and this caller laughed about how every day is a great golf day and Bob bemoaned that he is just another working stiff, working on a Saturday! (Query: Do I fall into that category?).

Caller #20 Larry: This caller started investing late and has been extremely aggressive. He has made a lot of money, mainly by trading in internet stocks like Priceline.com, Dr. Koop.com., Stamp.com but has also lost money in the Street.com. He said he is not a daytrader, but trades a lot. He has even traded commodities. Bob noted that if you went to the Hillary Clinton school of commodity trading, you could turn $1,000 into $100,000 in nine months! The caller asked if Hillary was so smart why was she staying with her husband? Bob laughed and said that was a low blow, no pun intended (I told you Bob was getting punchy!). Bob said he couldn’t argue with this guy’s investment strategy since it was working for him. Bob that he hoped this caller didn’t put too much money in individual stocks. There was also a brief discussion about CISCO which is a company Bob thinks very highly of. CISCO has had some price depreciation mainly because of its high PE trading around 70 times next year’s earnings. Finally, the caller wanted to know what Bob thought of someone’s prediction that the Dow will be 30,000 by year 2007. Bob said if he had to make a wager on that, he would bet against it.

Caller #21 Jay: His company is changing its provider for their 401k plan and has apparently given misinformation about the funds. They say they will offer load fund without offering loads? Bob said its possible that a load fund would not charge the load because sometimes the funds will offer different classes of shares. This caller mentioned Putnam Global Growth which has A,B,M,Y shares (alphabet soup). Bob remarked that one class has no front end load (the B shares) but does have a back end load of 5% and the annual expense ratio is 1.93%. Bob regards that as a very high expense fund.

Closing Comments from Brinker: It is a good idea for investors to focus on the expenses associated with the mutual funds. Also take into consideration the performance of the fund. There is a wide variety of performance out there and you can find mutual funds that have same objective with very different performances.

FINAL THOUGHTS FROM DAVID K a/k/a David Korn. Hope you enjoyed this summary -- it only took 14 hours to complete this time! If you want to get on my e-mail list and have my summaries e-mailed to you directly, remember, you must e-mail me directly at the following:
davidk555@earthlink.net

Other Resources:
Bob Brinker’s Web Site: www.bobbrinker.com
Moneytalk Phone Number: 1-800-934-2221

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