Moneytalk Bob Brinker Summaries - Information ONLY

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Top 318. Jul 25, 1999 10:41 PM

» David_Korn - Summary/Interpretation of Moneytalk for July 24, 1999

Summary and Interpretation of Bob Brinker's Moneytalk for Saturday, July 24, 1999 by David K. (E-MAIL: davidk555@earthlink.net)

OPENING MONOLOGUE: Bob opened his show by noting that the short term correction forces have taken prominence in the market. Last week was the single biggest one week correction since September, 1998. The market is dealing with a reality check and confronting the headwinds of high price to earnings (PE) ratios. The S&P500 recently traded above 28 times 1999 earnings for the first time in history. The Federal Reserve is concerned about inflation. They raised interest rates at the end of June by .25% even though they changed their bias to neutral. In the Humphry Hawkins testimony on Capitol Hill, Chairman Alan Greenspan, a/k/a Dr. Greenshades, provided some excellent greenspeak before Congress saying, "If new data suggests it is likely that the pace of cost and price increases will be picking up, the Federal Reserve will have to act promptly and forcefully so as to preclude imbalances from arising that would require a more disruptive adjustment later..." There is another Fed. meeting in August and one in October, but they can take action to raise (or lower) rates at any time. One should not be surprised if the Federal Reserve takes additional pre-emptive steps to stop inflation. Another quote from Greenspan was, "The economy may overheat if productivity slows..." At this point, it appears that the Fed. does not believe the .25% hike is going to solve the problem. The fact that the Fed. changed to a neutral bias didn't really make any sense.

Editorial Comment, hereinafter "EC": Have you ever said to yourself, what is this Humpty Dumpty report I keep hearing about? Well, I will tell you. The Federal Open Market Committee's Humphrey-Hawkins reports are delivered to the Congress semiannually in February and July pursuant to the Full Employment and Balanced Growth Act of 1978. The name Humphrey-Hawkins (not as good as Humpty Dumpty) refers to the legislation's original sponsors, Sen. Hubert Humphrey and Rep. Augustus Hawkins. The report addresses monetary policy in the context of the recent and prospective performance of the U.S. economy. If you want to read Dr. Greenspan's actual testimony before Congress, it is already posted on the web and provides great insight into the mastermind behind the greenspeak. Check it out at the following link:

http://www.federalreserve.gov/boarddocs/...

Of course, if you are more interested in finding out what happened to Humpty Dumpty, there is actually a new book out entitled, "Humpty Dumpty, After the Fall." Think I am making this up! Check out the following link to learn more about what happened after Humpty Dumpty had a fall:

http://www.iwl.net/customers/markr/humpt...

OPENING MONOLOGUE CONTINUED: (Pay Attention This Is Important!): Bob said the stock market could have in place bench mark "area" highs on the books. These area high numbers would be 11,210 in the DOW, 1418.78 in the S&P500 and 2864.5 in the Nasdaq -- all from the record closes on July 16th. In the past week alone, the DOW corrected 2.7%, the S&P500 corrected 4.3% and the Nasdaq corrected 6%. As usual, the Nasdaq showed more volatility because of such high PEs and fear of rising inflation fears. Interest rates are back in the 6% area in the long term bond up from 4.7% since last October. The long term bond is having trouble declining in face of inflation concern -- especially in view of possible world wide recovery. Also, the dollar is weakening which investors don't like to see. When we refer to these numbers as possible "area" benchmarks highs, we are saying that if we are heading to the end of the bull market run, these would start to be the early readings of a major top in the market. If this is true, then we may look back at 11,210 in the DOW, 1418.78 in S&P500 and 2864.5 in the Nasdaq as the opening salvo in the formation of an area for the top of the market. Bob expects to revisit these areas before the summer is over. We always have the possibility to go higher than these levels - perhaps a few percentage points higher if we are lucky. However, we must stay closer than ever to the market timing indicators. We continue to see the growing possibility of a change in investment policy for the first time in the 1990s.

EC: In my opinion, as a long time listener of Moneytalk, this is the most Bob has ever laid the foundation for a possible future bear market call. He is clearly staying close to his indicators and has not changed his fully invested position, but his cautionary statements on today's show certainly made me nervous about the market. I can imagine Bob reading this and saying, "that's good, be nervous, you should be vigilant with this kind of complacency and high valuations in the market"!

Caller #1 Audrey: This caller's broker is recommending that she put $400,000 in a charitable trust to get a 10% annual income and a tax break. Bob said he didn't understand how she was going to get 10% a year from this money, unless she was going to invest it in the stock market and hope for the best. Bob said he did not know how she is going to earn 10% annual rate of return safely. Starting from the most safe investment, Bob pointed out that if she invests in treasuries, she can get a 6% rate of return. With Ginnie Mae triple A rated bonds, she could get 6.75% rate of return and in single A corporate bonds she could get 7 and a fraction percent if she wanted to take the risk. Bob said she should go ask her broker/advisor how she was going to safely earn 10% annually and then call back the show with the answer. EC: hmm, I smell shark bait.

Caller #2 Peter: This caller has 2/3 of his portfolio, or about $250,000, in cash and wants to get in technology stocks. He wants to know if Bob would sit back and wait for the valuations to come down, or should he begin to dollar cost average in right now. Bob first mentioned that investors can build their wealth comfortably by investing in noload mutual funds vs. individual stocks. Bob than agreed that Nasdaq stocks have nosebleed valuations, noting that CISCO, for example, was trading at around 76 times earnings when the stock was at about $70 per share. Bob said why are individuals unable to distinguish between a great company like CISCO and a great stock based on valuation. Bob believes that the caller is doing the right thing by being cautious. Bob thinks there is a lot of stock for sale when the DOW trades in the 11,000s.

Brinker Comment: Bob says the efforts by the House of Representatives to pass a 792 billion dollar tax cut, with almost 80% of the tax cut going to people earning over $100,000 a year is a joke. The bill will be quashed by the President. Alan Greenspan says he doesn't support the tax cut. How much of this tax cut goes to people making less than $59,000? Only eight percent. For those making less than $18,000 a year, they would get virtually zero. Bob has nothing against people making six figures, but in an overheating economy, to propose a tax cut that goes almost entirely to those earners is ridiculous. EC: Pay down the national debt!

Caller #3 Ken: This caller asked which is a safer investment, Ginnie Mae or a short term treasury fund. Bob says short term treasuries offer less volatility. The Vanguard prime money market has no volatility and a yield of around 4.75%. The next level of risk is short term treasuries which have a little fluctuation. The next level of increased risk is the Ginnie Maes. During the decade of 90s, they have fluctuated in a range between 9.3 to 10.5 and is now trading around 10. The caller asked if Greenspan raised interest rates, would the prime money market rate rise? Bob says we don't know, since in the past there have been times were the Federal Reserve tightened monetary policy which led to a decline in the medium and longer term rates because investors were convinced the economy would slow. Thus, we cannot assume that will be the case.

Caller #4 Doug: This caller asked Bob to comment on the book, Common Sense on Mutual Funds by John Bogle, the founder and chairman of Vanguard Mutual Funds. The caller asked if Bogle's discipline of dollar cost averaging throughout all of the seasons of the stock market conflicts with Bob's timing model. Bob said he doesn't expect everyone to do what he does, i.e. market timing. The caller pressed Bob by asking if that means Bob doesn't agree with Bogle's philosophy. Bob retorted by pointing out that he has so much respect for Bogle, that he recommends at least two of his books on his web site (www.bobbrinker.com). Bob said that if the caller is asking whether he will intentionally ride out a bear market, the answer is no.

Caller #5 Mel: This 70 year old semi-retired caller from California has a pension plan with a company that is going out of business and they want him to role over a pension plan worth $200,000. The caller wants to put it in a safe place yet be able to generate income without stock market risk. His tax bracket is about 38%. Bob said the caller could consider California general obligations and stagger the maturities and possibly get rates of close to 5% and lock those yields in and collect the interest tax free. Bob noted that this was going to be in a personal money account, not a tax deferred account. Bob said if the money was going into a tax deferred account, he could use taxable bonds such as Ginnie Maes.

EC: To learn more about investing in State municipal bonds and the tax advantages associated with such investments, check out the following link:

http://www.investinginbonds.com/info/igm...

Caller #6 Ben: This caller is in retirement with a net worth of $1 million dollars. He has 75% in equities and about $150,000 in CDs (EC: those are certificates of deposit, not compact disks). Jaws 3, his financial advisor, is recommending that he put some of his CD money into the stock market. Bob says he doesn't get it, the caller's equity ratio is already high. Bob recommends the opposite, keep that money out of the stock market and reduce his stock market exposure to 50% equities. Bob said this was bad investment advice and a perfect example of why investors need to keep their EYES WIDE OPEN.

EC: Speaking of Eyes Wide Open, last night my wife and I saw Eyes Wide Shut. I am not sure if our marriage is better or worse for it. Enough said.

Caller #7 Rick: This 28 year old caller and his wife both work for an internet company that recently went public. He is considering liquidating some portion of his assets. The caller could raise $500,000 pre-tax if he exercised his options in the company. Bob said it was hard to give advice not knowing the company. Bob told the caller that since we could change our investment policy and became risk adverse, Bob would recommend that we be out of equities. Moreover, if we enter a bear market, internet stocks and high PE stocks are probably going to be extremely volatile and vulnerable.

Caller #8 Dale: This caller and his wife disagree whether Lucent is running out of gas. Bob said Lucent better have several years of growth ahead because the stock is trading at 63 times future earnings. These are nosebleed PE levels in comparison to historical earnings multiples. Bob would consider Lucent to be a market stock and would follow the market timing model relative to this stock. (i.e. hold if timing model stays bullish and sell if model turns bearish).

Brinker Comment: When Chairman Dr. Greenspan, a/k/a/ Dr. Greenshades a/k/a Dr. Greensleaves delivered the Humphrey-Hawkins report, he was derided by Representative Barney Frank - Massachusetts Democrat. Barney Frank was speaking to the Chairman about the preemptive nature of the Fed's interest rate changes before tangible signs of inflation are on the table. Dr. Greenshades said, "Most of the time we can not be preemptive because the future is opaque. It is very difficult to forecast successfully and we do not believe that it is appropriate for us to act unless we have a reasonable conviction that certain imbalances are arising..." Bob thinks that Dr. Greenpeas is losing sleep over the Columbia University CIBCR inflation index which has seen a high increase in rates. This rate caused Greenspan to be in his hawk suit when he arrived to testify. Dr. Greeneggs and Ham also spoke about productivity. With respect to accelerated productivity growth, the thought is about 1% has been knocked off the inflation rate because of increased productivity. This is a big deal. This leaves the anticipated consumer price increase between 2.25-2.5% for 1999. Bob concluded his remarks by noting that inflation is perhaps the single most important number when evaluating the stock market. If you had to boil it down to nuts and bolts, you would want to know the inflation rate and the real rate of growth in the Gross Domestic Product.

Caller #9 Marcus: This 42 year old caller has a whole life insurance policy with an accumulated cash value of $10,000 and a $150,000 death benefit. Bob thinks he should invest the $10,000 and use the return to pay for the premiums of a $150,000 term life insurance policy.

Caller #10 Andy: This caller posed an interesting question. Since many investment professionals talk about and follow the same market indicators that Bob does, (such as sentiment, valuation, federal reserve policy and interest rates), since these people can act very quickly and short the market, isn't it possible the market could sell of if Bob's timing model turns bearish before Bob's listeners could do anything? Bob said he disagrees with the caller's premise. Bob does not believe that everyone uses the indicators that he uses. In fact, Bob sees a tremendous amount of bulls out in the market. The investors intelligence survey which measures the amount of bulls as a percentage of bulls and bears in the market shows that there is anywhere from mid to high 60% bullish analysts as a percentage of bulls to bears. Bob referenced his past calls this decade where he was a voice in the wilderness. Bob concluded by saying that as far as he knows, nobody uses his methodology for timing the market which happens to be proprietary. The caller then asked Bob to comment on a valuation basis vs. growth rate the Russel 2000, Midcap 400, Nasdaq 100 and S&P500. Bob says the Nasdaq stands out as the index with the extraordinarily high PE ratio -- just look at CISCO which is a great stock, but probably does not have huge upside potential. The caller's last question was: At this juncture would it be more prudent to be in small to midcap stocks? Bob said there is no evidence that this would be a better place to be invested. Small caps have had periods of rallying relative to the market; however, the year to date numbers are lacking. For 1999 year to date, the S&P500 is up 11.1%, Total Stock Market 10.7%, Small Cap Index is up 8.9%. Moreover, if it is true (we don't know yet) that we are about to have a major market change, people will become more risk adverse, not risk and thrill seeking (EC: which would mean they would stay even further away from the smaller riskier stocks).

Caller #11 Jack: This caller is 63 years old and retired. He and his wife have $300,000 in Portfolio II and they want to switch over to Portfoleo III. They have $24,000 income per year in benefits which is like a $400,000 phantom asset. In looking at the asset allocation in Portfoleo III, which has a 50% fixed income, 50% equities, he is wondering if he uses the phantom assets, should he stay in portfoleo II. Bob says if his market timing model says we need to change investment policy to become risk adverse, that would have dramatic implications for all the equity portfoleos which would be reduced to no equities, and possibly for Portfoleo I or II to go into a net short position with the market.

Brinker Comment: Dr. Greenspan showed up in a hawk suit before Congress on Thursday. There were rumors that London had odds that Andrea would be dressing up Alan as a dove for his appearance on Capitol Hill. They lost the bet. People apparently thought that because the Fed. changed their bias to neutral, the Chairman would have been a gentle dove, instead of a hawk. Wrong! Even more troubling, on Friday, J. Alfred Broaddus, Jr., President of the Federal Reserve Bank of Richmond, stated that United States policy makers must relentlessly scan the horizon for signs of inflation. Alfred stated that he sees few signs the economy is slowing down. Bob noted that in a little over a week we are getting a very important number on unemployment which will be scrutinized by everyone.

Caller #12 Rick: This caller wants to transfer $11,000 out of Oppenheimer Global Fund A from an IRA to his company's account which has about 10 choices of funds. Bob said he could just switch his IRA into an index fund, and he needs to be aware of tax consequences of moving any money out of the IRA. With respect to his company's retirement account, Bob recommends going for their index fund which is a no brainer and a hole in one.

EC: For those of you who think following Dr. Greenspan's career is boring and instead are focused on the WBBMTSPGT watch (the "Will Bob Brinker Make The Senior Pro Golf Tour" watch), Bob disclosed that his putting is getting better and he only had 14 puts on the front nine the other day.

Brinker Comment: In the July 5, 1999 Barron's in the Lipper Mutual Funds quarterly edition, there is a great article in Section F, page 5 entitled, "This May Sting." This article addresses the sky high valuations of equities at the present time and suggests that they may be insupportable over the long term which could result in regression to the mean. If you look at the S&P500 between 1926 and June 30, 1999, we have an 11% compound annual return with lots of volatility on a year to year basis. If we get regression to mean, we would have to get lots of lower returns than we have had in recent years. You can find this Barron's issue in the Library.

Caller #13 Mark: This caller has $100,000 in assets, all in equities. He has $40,000 in total stock market index, $30,000 in Vanguard500. The rest is in Applied Materials which he bought in October for 28 upon Bob's recommendation. The caller and wife have $60,000 in school loans at about 7.5% interest rate (not tax deductible). The caller asked if we get to a point where Bob changes his investment policy, would there be any stocks that could be held through a bear market? Bob said that if you were going to hold a stock through a down period in the market, you would have to make selections based on value, For example, if you have a stock that was depressed, a stock that had not participated in a run up, a stock trading reasonably close to book value, then you could make an exception for a stock like that, limiting it to of course only 4% of your holdings. But for stocks like Applied Materials that have had huge runups and are exploited for the general market, in a bear market it will be difficult to make money on stocks like those since there are huge profits that have been made, and people will take their profits.

Brinker Comment: Bob said it is amazing to learn how more people are quitting their jobs to become daytraders. Bob mentioned the jockey for the horse Charismatic, Chris Antley, who decided that he can do better than those running his retirement plan. According to a story in Barron's, Chris has a stock tip sheet called the Antman's report and he is now a daytrader. Bob noted that the mutual fund sales have declined 35% this year from a year ago. Why? Because so many people think they can beat the market picking individual stocks. Bob says its unfortunate because it is going to end, its just a matter of time.

Caller #14 Jerry: This caller asked Bob if he was on a desert island and there was only one broker on that island who told him he could have his choice of three international funds, which funds would he choose and why. Bob said we don't recommend specific funds on the program, but if the caller requested a back issue of Marketimer, he could see what funds Bob recommends. The caller asked if there were any load funds that consistently did well that Bob would recommend. Bob said if there are any, they are rare and hard to find and for that reason, if he had to pick one fund in the U.S., it would be the Wilshire 5000 total stock market fund. (no load).

EC: Do you want more information on the Wilshire 5000, check out the following link:

http://www.indexfundsonline.com/indexinf...

Brinker Comment: In the July 26th edition of Investors Business Daily on page 4, Section A there is an article that suggests getting married brings you higher wages. The U.S. census numbers show that 58% of the people who make the most money are married. Only 27% of the people making the most money have never been married. The article suggests that many of the things that make an employee attractive to an employer are the same qualities that make him attractive as a husband (i.e. dependability, creativity, diligence). Why? Getting married makes men more productive. A spouse can help a husband, act as a sounding board, or help out with other activities that assists the husband's work life. Married men are fired less frequently and get better performance ratings and are more likely to be promoted. EC: Has anyone given this article to Gloria Steinham?

There is also statistical evidence in the article showing the amazing U.S. economy in action. Going back to 1994, there is only one quarter in which the Inflaction Adjusted Gross Domestic Product came in below 1.75%. Retail sales are up 8% year over year. In 1996-1998, that number was between 2-6% which shows the rapid growth this year. The jobless rate was almost 8% in 1992, now it is in the low 4%. Inflation appears dormant. The CPI is showing a 2% rate of increase over the last year. Producer prices are moving back down. The growth and average hourly earnings is important and the year over year change in that number is about 3.7%. However, that is before productivity which is about 2% which is offsetting the increase in hourly wage. For example, if your company pays you 4% more per hour, but you produce 2% more widgets per hour because of new technology, that slices into the inflationary increases caused by increased wages.

Brinker Comment: Bob said too many people believe that they are entitled to 20% returns ever year in the market and have almost made a religion out of the stock market. Bob compared that type of investor to people going to the races who tend to bet on the horse that has the best recent performance. Bob says a lot of investors are betting on the market the same way. Instead of being skeptical, they become believers that they will get repeat incredible performances year after year. Bob says we are going to have to work very very hard to keep on top of this market.

EC: "I find that the harder I work, the more luck I seem to have." - Thomas Jefferson (1734-1826)

Caller #15 Paula: This caller wanted to purchase a general obligation bond. Bob said if she buys a California General Obligation which in his opinion does not have a risk of default, she will collect interest and get her money back. Bob said she can go to a discount broker to get one, but she should shop around for the best possible yield. Remember, a California General Obligation Bond is a commodity. The caller also asked what she should do with her holdings in Stanford Telecom (STII) (EC: Bob recommended purchase of STII several years ago). Bob recommended that she take profits noting that the company is the target of a takeover offer from Newbridge Network's Corp. in Canada. The stock has had a massive runup and there is always the risk that the deal will fall apart. Bob said he would recommend sale of STII on Monday. The caller then asked if she should sell her holdings in Applied Materials, CISCO, Novellus. Bob said we are firstly guided by the 4% rule. Second, Bob would recommend sale of these stocks in the event his timing model issued a sell signal.

Brinker Comment: The New York Times reports that the New York Stock Exchange (NYSE) is moving rapidly to leave behind their non-profit status and offer shares in an initial public offering, even as early as November, 1999. This is a huge change for the stock markets in the U.S. The Nasdaq market is also talking about going public. The board of Nasdaq's parent organization, the National Association of Securities Dealers, will review next week a plan which could result in the Nasdaq going public. The theory behind these markets going public is that these exchanges will be beter financed and better adapted to changes, especially with regard to electronic trading. There is also talk about the exchanges trading after hours, but the NYSE has delayed that which is a good thing. With Y2K out there and the NYSE going to a decimal system next spring why not wait. There is one stock exchange in the world already publically traded, the Australian Stock Exchange. The whole notion of these stock exchanges going public to make a profit started overseas. There are six exchanges that are for profit, with the Australia Stock Exchange for profit and publically traded. Bob says wouldn't it be ironic if these exchanges went public at the height and end of the bull market.

Bob also mentioned that Sunrise International was decimated on Friday on bad news from the FDA. The stock went from 11.28 to 3.72 -- a 75% drop in one day. Bob noted this was a stock highly touted on the internet message boards and once again underscores the danger in speculating with stocks based on message board hype.

EC: If you think the land down under is the place to invest, check out the Australian Stock Exchange's Web Site at the following link:

http://www.asx.com.au/

Caller #16 Cynthia: This 44 year old has $79,000 in Microsoft which started as a $4,400 investment on Bob's recommendation. Her net worth is $380,000. Bob said she should sell Microsoft Monday to get down her percentage holding in that stock so that will only constitute 4% of her holdings. She also has $124,000 in a loaded fund and wants to move it to one of Bob's recommended portfoleos. Bob said she might want to wait until market timing model gives some clear guidance in the near future, because it may turn out that she should put the money in a money market fund.

Caller #17 Kirk: This caller pointed out the irony in the fact that Dr. Greenspan's investments are held in a blind trust which means he really has no control over his assets during the greatest bull market of all time that he helped orchestrate. (interesting observation). Bob noted that Moneytalk has "nominated" Dr. Greenspan for the Nobel Price in Economics.

EC: The 1998 winner of the Nobel Prize in Economic Sciences was Amarya Sen for his contributions to welfare economics. (If you knew that, you go to the top of the Moneytalk class). Two of Amarya Sen's famous works are, On Economic Inequality and Poverty and Famines. If you want to learn more about him, and other Nobel Prize Laureates in Economics, check out the following link:

http://nobelprizes.com/nobel/economics/e...

Brinker Comment: We are coming to a period of time which could become crucial for stock market investment policy. We will continute to monitor the many variables affecting the market. Bob said he is almost willing to predict that because there is so much bullishness and complacency, that if and when we get to a point where we have to change our investment policy reading because of a change in the timing model, there will be many people who will scoff at Bob's advice.

Caller #18 David: This caller wanted to know if you use a phantom investment from social security/pension in determining critical mass. Bob said the phantom balance sheet comes into play in determining your asset allocation base. The important calculation to determine if you have reached critical mass is to find out if you have the cash flow from your income and investment portfoleo to provide you with the lifestyle that you seek.

Brinker Concluding Remarks: What do you do when valuations are carried to incredible levels? That is the question we deal with going forward.

FINAL THOUGHTS FROM DAVID K. a/k/a David Korn: Did you like the summary? If so, tell a friend and spread the word! Tell people to e-mail me at: davidk555@earthlink.net Also, read my new DISCLAIMER below. I think you will find it absolutely fascinating. Not!

DISCLAIMER: I am just a listener to Moneytalk and provide this summary/interpretation on my own volition. I am not associated with ABC Radio Networks, Moneytalk or Bob Brinker and this summary/interpretation is neither sanctioned by, nor written under the auspices of, ABC Radio Networks, Moneytalk or Bob Brinker. The summary/interpretation is simply my own interpretation of the show, along with information I provide that I think is useful to help better understand financial issues. Of course, you get the humorous antidotes as an added bonus. You should not rely on any statement made in David K's Summary and Interpretation of Bob Brinker's Moneytalk as constituting financial advice. God bless the lawyers.

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

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