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Top 729. Mar 14, 2005 9:07 PM

» David_Korn - Bob Brinker Charity Appearance

Hello all. I would like to share with you an excerpt from my newsletter this weekend which covers Bob Brinker's live charity appearance this past weekend. Enjoy!

Excerpt from David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.

March 12-13, 2005 Weekend Newsletter

BOB BRINKER

Bob spent a busy weekend in California. In addition to his radio gig, he was the featured speaker for the KGO Radio Cure-a-Thon for Leukemia and Lymphoma Society. On Saturday, he spoke at the Geary Theater in San Francisco and on Sunday, he was at the Fairmont in San Jose.

I am pleased to be able to provide my subscribers with a summary, interpretation and commentary of Bob's charity appearance in San Jose, courtesy of my long-term subscriber, Peter. From my experience, Bob has always been more candid about his market thoughts at these charity appearances, and they make for good outings. This one is no exception!

Bob Brinker's Charity Event Appearance in San Jose, California

Guest Editor: Peter
Editorial Comments ("EC") by David Korn

Peter: I attended Bob Brinker's live appearance at the Fairmont Hotel in San Jose, California on Sunday, March 13, 2005. The Fairmont donated their serves and space for the event which benefits the KGO Radio Cure-A-Thon. I estimate that there were about 1,000 people in the audience. If I had to guess, I would say the average age was 45-55 years old, with about half men and half women. The event lasted from 9:30 a.m. until 10:45 a.m. Bob was introduced by Michael Finney who is a consumer reporter for KGO Radio and TV.

EC: At the San Francisco event, KGO Morning News Anchor Ed Baxter introduced Bob. Both the San Francisco and San Jose events were sold out -- a testament to Bob's popularity in the California area.

Peter: Michael asked Bob some "canned" questions. Those questions and Bob's answers, as best as I can recall are below.

Question #1: What are the root causes of a Bear Market?

Answer to #1: Bob said he discussed this in his February, 2005 Marketimer newsletter. The root causes of a bear market include: (1) Tight Money; (2) Rising Inflation; (3) Rapid Economic Growth; (4) Overvaluation; and, (5) Rising Rates. Overall, Bob doesn't see a bear market on the horizon yet. Bob said he believes short term interest rates should rise to 3% in May or June. Bob said "overvaluation" is a pre-conditioner for a bear market. He said when he last talked in March 2000 in San Francisco, he was very uncomfortable because had forecast the bear market. BOB SAID HE BELIEVES THE S&P 500 WILL GO INTO THE HIGH 1200s THROUGH THIS YEAR. He said Alan Greenspan doesn't like long-term rates staying low. Although we are seeing higher gas prices, these are anti-inflationary because it takes money out of the pockets of consumers.

EC: This is the first time I have heard Bob make a specific prediction that the S&P 500 will go into the high 1200s this year. Its not surprising in and of itself given his belief on corporate earnings. Currently, the S&P 500 stands at 1200. If you go by Bob's estimates for corporate earnings, and juxtapose it against the valuations that the market has historically afforded stocks in periods of low inflation, the high 1200s is doable. This prediction supports Bob's current belief that the cyclical bull market has some legs, even though the "easy" money has been made -- a prediction that he has recently reiterated on air.

EC#2: With respect to Valuation, Bob has maintained his estimate that S&P 500 operating earnings for 2005 will be $69. Using $69 as an estimate, that would translate into a forward P/E ratio of 17.39. In periods of low inflation and steady economic growth, the market can sustain a valuation metric of 18-19. Bottom line? One of the primary root causes of bear markets is not yet in place, and one of Bob's timing model indicators (Valuation) remains in favorable territory.

Peter: Bob then discussed what he looks at in his stock market timing model. He looks at (1) Economic Cycles; (2) Monetary Policy; (3) Valuation; and, (4) Sentiment. Bob said with respect to Monetary Policy, the Fed doesn't want to "rock the boat" by raising rates too much for fear of homeowners being unable to make their monthly mortgage payments. Bob said there is currently no problem with the Valuation Indicator (EC: see above) and that Sentiment is exciting to watch, especially the 60-day moving average of the put-call ratio. Currently, that stands at 0.82 which is a bullish indicator.

EC: I updated all of the sentiment data that I believe Bob follows in his model. The 60-day put/call moving average is actually up to 0.84 which is better as far as Bob's timing model is concerned as it indicates even more fear then when Bob last checked it. I suspect he got the number of 0.82 based on last Monday's close which is when Bob conducts the weekly update of his timing model.

EC#2: Another of Bob's favorite sentiment data points is the Investor's Intelligence Survey. According to that survey, the number of bullish advisors rose from 54.7% last week, to 55.7% in the latest reading. The number of bearish advisors declined from 22.1% last week to 21.6% this week. Using the formula [(bulls)/(bulls + bears)], the sentiment ratio is 72.05%. Bob uses the four-week moving average which is 71.91%.

Peter: Bob told the audience that even though he thinks the market will go higher this year, he still believes that we may have corrections of 10% or more.

EC: For the benefit of my new subscribers, my study of the other cyclical bull markets during the 1966-1982 secular bear market shows that the largest corrections came in the range of 10%-16%. It bears noting that we haven't had a 10% correction in a long time.

Question #2: What are some threats to the stock market?

Answer to #2: Bob said oil, fiscal policy, and an overheating economy pose threats to the market. Bob said he doesn't know where oil prices are going. Fiscal policy is out of control. With respect to the economy, Bob said to watch the employment report released in April closely. If that number "explodes" it will not be a good thing because of the impact it will have on inflation.

EC: The employment report for March will be released on April 1, 2005. As Bob noted, the employment report is crucial to get a gauge on the economy. Its not just the number of jobs, but also wage trends and wage inflation. If wage inflation threatens, you can bet interest rates will rise, and bonds (and often stocks) will decline.

EC#2: Another obvious threat is a terrorist attack on U.S. soil. That would likely have a tremendous negative impact on the stock market, depending upon the scope of the attack.

Question #3: Bob was asked to discuss his views on market volatility.

Answer to #2: Bob started off by mentioning the QQQ trade. The audience exploded into laughter and he admitted it was a BIG mistake and it would never happen again. He said he looked for a counter trend rally in a bear market and it didn't work. He said he wishes he had put a stop-loss on that recommendation and he takes the blame for the mistake. He also said he took a lot of heat for his January 2000 call to go to cash. One tech stock holder was very upset when the market continued to rise, but he didn't hear anything from him again after March 2000. Bob said on March 10, 2003, he and his son were up all night when everything fell into place for his call to reenter the market.

EC: Its refreshing to hear Bob discuss his mistake in a public forum. I have long criticized Bob for not addressing his mistake on the radio, and discussing what went wrong and why he made the decisions he did and how he learned from those mistakes. I have also criticized Bob for only publicizing his good recommendations, while ignoring his bad recommendations like the QQQ.

EC#2: I have elaborated in detail in my newsletter the things that I believe fell into place on March 10, 2003, which led to Bob deciding to reenter the market. Most importantly, it was a 90% down day in the market -- a timing tool that I am 100 percent convinced Bob relies on. Second, it occurred on a Monday, when Bob updated his timing model. Finally, the market was back into the area of the lows as measured by the S&P 500. Bob obviously felt that it was a good level from a risk/reward standpoint to go back into the market.

Question #3: Bob was asked to discuss his views on the real estate market.

Answer to #2: Bob said 23% of today's home purchases are by investors or people buying 2nd or 3rd houses and he is fielding many more radio calls regarding real estate than ever before. He mentioned a couple who bought two condos on speculation in Florida and flipped them before moving in. Bob advised his audience to avoid speculation. In addition, Bob said adjustable rate mortgages are a fool's bet. Lenders want you to take an adjustable rate mortgage. Fuggetabout it. Go with a fixed rate, which aren't that much higher.

EC: Bob discussed the housing market again on the radio this weekend. Clearly, the speculation in the real estate market is starting to disturb Bob. It already has the attention of Alan Greenspan, who knows that if rates start moving up fast, the housing market -- and particularly individuals who are leveraged on adjustable rate mortgages -- could be in serious trouble.

Question #4: Bob was asked what he thought about Alan Greenspan.

Answer to #2: Bob said Alan Greenspan is a "huge" role model.

EC: Does that mean Bob updates his timing model in the bathtub like Alan Greenspan reviews the economic data?

Peter: After the pre-prepared questions, Bob went on to take questions from the audience. Those that had questions were required to fill them out on a 5" by 8" card with their name, city and question and submitted them before the show began.

Audience Question #1: Where do you see the S&P 500 in 2005 and in 2006?

Brinker's Response: Bob said he will follow his indicators. Bob said he believes we are in a secular bear market megatrend, which can last as long as 20 years. As of now, there are no caution lights and things look ok and will grind to the upside.

EC: Bob's comment that there are "no caution lights" comports with my view of his timing model, although inflation can change the outlook very rapidly. That is why the employment report is so important. I also concur with Bob's phrasing that the market will "grind" to the upside. I interpret that is the same view I hold; namely, that gains will be hard fought.

Audience Question #2: What will impact interest rates over the next five years?

Brinker's Response: Bob said he only predicts rates out to 12 months and that economic growth sets the rates. Rates look okay right now, and the GNMA Fund, for example, has been trading in a narrow range.

EC: Bob has recently said that he expects the yield on the 10-year treasury to trade between 4% and 5% for the time being.

Audience Question #3: Why is the Nasdaq under performing and will it improve?

Brinker's Response: Bob said its because the Nasdaq has a higher beta and more volatility than the S&P 500. The underlying trend is very important and the Nasdaq is only 43 points higher than it was about 14 months ago. BOB SAID HE MAY DIVERSIFY HIS MODEL PORTFOLIOS IN THE NEAR FUTURE.

EC: VERY Interesting. Bob's aggressive Model Portfolio is weighted pretty heavily in technology. Perhaps Bob will sell off some of the technology for cash, or put it in something like the total stock market index. Not a bad idea given the run the Nasdaq has had.

Audience Question #4: Who will be your successor?

Brinker's Response: Bob said he only makes 12 month contracts with ABC Radio and does not know the answer and that is why he only takes 12 month subscriptions to his newsletter, but he has been doing both for 20 years.

EC: I can think of a GREAT successor. smile

Peter: Bob then picked up the next card and said, "CRAIG IS ON THE LINE". He blew it (it wasn't an intended joke), and the audience initially cracked up and then applauded when Bob said it shows that he doesn't have a life!

Audience Question #5: How do you get a family member interested in investing in the stock market with limited funds?

Brinker's Response: Bob said he would start by opening a Vanguard Prime Money Market Fund and build from there.

EC: I don't know that Bob really answered the question, which is how to get someone "interested" in investing. Opening a money market account is not a bad idea as it will keep your money safe until you learn what to do and Vanguard is as good a place as any to have a retirement portfolio. If you wanted someone to get interested in stocks, who had very little money, you might have them start with a service that allows you to buy stocks for a very small amount per transaction. One such company is Sharebuilder which allows you to start buying stocks at just $4 per investment. Learn more about Sharebuilder at this link:

EC#2: Another way to invest in stocks without paying commissions is through what are called "Drips." Drips is actually a nickname for the acronym DRP which stands for Dividend Reinvestment Plan. A related concept are the Direct Stock Purchase Plans (DSPs). These plans are offered typically by blue-chip companies where you can invest small amounts of money by purchasing stock directly from the companies. Want to learn more about this type of investing? Start here and follow the links:

http://www.fool.com/school/Drips.htm

Audience Question #6: Why won't Schwab sell the Meredian Fund that you recommend in your Marketimer newsletter?

Brinker's Response: Bob blamed it on the state of Nebraska which has a conflict with the fund manager, so if Schwab can't sell it in all 50 states, they won't offer you the ability to trade it. Bob added that you can purchase it directly from the fund family.

EC: I think this question was referring to the Meridian Growth Fund (ticker: MERDX) which is a no load fund that Bob has recommended. The fund has an impressive record, having outperformed the S&P 500 for 1, 5 and 10-year periods. The primary objective of the fund is to seek long-term growth of capital by investing primarily in growth stocks, including those with small and medium sized market value. Richard F. Aster, Jr. has done a find job of managing the fund since its inception in August, 1984. Learn more about the fund here:

http://www.meridianfund.com/merdx.cfm

Audience Question #7: What could cause bonds to go down?

Brinker's Response: Bob said to watch the employment report that comes out in April. If we get 500,000 new jobs, interest rates will go up, and bond prices will go down.

Audience Question #8: What can you do if you lost tons of money in your brokerage account?

Brinker's Response: Bob said there is probably an arbitration clause in the contract and that he should take advantage of it.

EC: The question from the audience actually named Merrill Lynch specifically, but Bob's advice applies to any account. Of course, if the mistakes were your own, don't expect too much. On the other hand, if your broker made an unauthorized trade without your permission, you might have something. The Securities and Exchange Commission has created a web site entitled, "Fast Answers" which addresses many of the questions and concerns encountered by individual investors. Check it out at this link:

http://www.sec.gov/answers.shtml

Audience Question #9: How do you apply one of the model portfolios to a 401(k) plan at work?

Brinker's Response: Bob said to use the Active/Passive portfolio (90% total stock market and 10% international).

EC: I actually think Bob's Active/Passive model portfolio makes the most sense if you strictly want to follow Bob's market timing efforts, and avoid the hit-or-miss performance Bob has had with his selection of managed mutual fund.

Audience Question #10: How many people are on your staff?

Brinker's Response: Bob said he has written every newsletter himself from day one. He does have an office manager and staff in Colorado and many "suits" in New York.

EC: I think Bob also frequently consults with Sheldon Jacobs (editor of the No-Load Fund Investor Newsletter), who he partnered with in the former "B.J. Group" of which Bob Brinker and Sheldon Jacobs were principles. Since July 2000, Bob has partnered with GE Private Asset Management.

Audience Question #11: Do you see the Northern California real estate market continuing to increase? Bob said he relies on a person from the University of California Berkeley who says there is higher vulnerability at higher prices and that there is a 15-25% risk level in Northern California. Bob added that in Silicon Valley, many of the principal producers in the world reside and that is not going to change -- it is an intellectual trophy location of the world.

EC: I suspect Bob relies on Ken Rosen, an expert in real estate and chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. Rosen was interviewed, along with two other "experts" in a San Francisco Chronicle article entitled, "On the Record: Bay Area real estate" which you can read at this link:

http://tinyurl.com/6llpz

EC#2: Learn more about UC Berkeley's Fisher Center for Real Estate and Urban Economics at this url:

http://groups.haas.berkeley.edu/realesta...

Peter: That was about all she wrote.

EC: Thanks very much Peter! I hope you enjoyed this exercise as much as I did. I think it provided a lot of insight about daBrink and his views that you would not ordinarily get on your typical Moneytalk radio broadcast.

FINAL THOUGHTS FROM DAVID KORN: If you would like to learn about my service, visit the Bob Brinker Fan Club Hosted by Suite101.com

- David Korn, editor of http://www.BeginInvesting.com

DISCLAIMER: I am not associated with ABC Radio Networks, Moneytalk or Bob Brinker and this service is neither sanctioned by, nor written under the auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is not a substitute for listening to Moneytalk, it is only my interpretation and commentary of some of what is discussed on Moneytalk, along with additional educational information that I include, editorial comments about the market and helpful financial links. I also provide my own stock market commentary to subscribers as part of my service and give them access to my web site, www.BeginInvesting.com. If you want to know what was said verbatim on Moneytalk, listen to the show live or subscribe to "Moneytalk on Demand" which allows you to listen to the show in case you missed it live. The web site, bobbrinker.com has all the links to the ABC Radio Network stations that broadcast the show live. The information contained in this newsletter is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security. This newsletter is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright David Korn, L.L.C. 2005.

-- posted by David_Korn

Top 730. Mar 17, 2005 5:41 PM

» Kirk - Re: Bob Brinker Charity Appearance

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David got this reply to his post on another message board.

In response to Bob Brinker Charity Appearance posted by David_Korn:

To: davidk555 who wrote (21940) 3/17/2005 6:48:03 PM
From: Tim Bagwell 21942 of 21942

David, I attended the Saturday event in San Francisco and the questions appear to be very similar to what you reported. Thanks for your post.

It was interesting to see Brinker in person. After the Q&A session he met one on one with people in the lounge of the theater. I wanted to talk to him but the line was long and didn't move at all for 20 minutes so I gave up. KGO did a poor job in running this portion of the appearance.

Ed Baxter did give him a question about the QQQ(Q) CTR trade. Many in the audience chuckled at the question but a few people made loud moans and groans. Brinker responded to the groans by trying to make a joke and laugh it off. He would only say that the trade was a mistake and that it will never happen again (meaning that he will no longer give short term calls to subscribers). That was it. No apology and no real explanation. It was clear from the audience reaction that many, many people were not only familiar with the QQQ(Q) trade, but probably got caught in it.

I can't say that I was overly impressed with the appearance. Much of it was just what you would hear on a typical weekend radio show. Brinker did give one observation about oil that I thought was interesting. His take on the oil situation is that higher oil prices are actually anti-inflationary since they take money out of the economy which slows the growth rate. Brinker says that the one thing that worries him most about the market is that growth starts to overheat. As long as the growth rate is moderate then he thinks the market will continue to do well. So oil actually helps to keep growth from overheating which leads to a more healthy stock market. That view goes pretty much against the conventional wisdom of the talking heads.

Brinkers view on the current market is still bullish. He expects that the market can sustain P/E's as high as 18 or 19 before the cyclical bull winds down.

I've been very critical of Brinker over the last years but it was interesting to finally see him in person. His appearance was for a good cause and, although he still owes us an explanation about the QQQ(Q) fiasco, at least he has finally faced some public scorn for it. If he wasn't sure before, he now knows it remains a touchy subject for many.

-- posted by Kirk

Top 731. Apr 27, 2005 7:28 AM

» Kirk - Why Brinker is BULLISH as of 4/27/05

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Originally posted HERE

Author: Kirk
Discussion: Bob Brinker Free Discussion Site 59,820+
Date: April 18, 2005 8:42 AM
Subject: Why Brinker is BULLISH

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In response to Re: Market posted by bobcat66:

Since Bob took the weekend off following the market decline does that mean he was busy cranking the numbers on his indicators? Should we expect a sell signal soon?
Jack

Not by my calculations:

In Brinker’s January 2000 Marketimer he published his “Five Root Causes for a Bear Market”

They are

Tight Money:
Rising Rates:
High Inflation:
Rapid Growth:
Over Valuation:

In January 2000, he took 60% out of the market because:

Tight Money:He said the Fed was reducing M2 to slow growth - BEARISH
Rising Rates:He was predicting higher long and short term rates to continue. This did not happen but it was – BEARISH for his model..
High Inflation:He said the CPI was approaching 3% and import prices were up 5% which would further impact inflation. We didn’t get high inflation, but this was BEARISH for his model none the less.
Rapid Growth:Real GDP growth was approaching 5%. Bob felt the FED would use rates to try and slow this. This was was BEARISH and correct.
Over Valuation: “We believe valuation levels in the U.S. market are stretched to the limit.” BEARISH

All 5 of his root causes were BEARISH.

Now lets look at the 5 root causes today:

Tight Money:You’re kidding right? They’ll give a loan to buy a home with zero down. To me, it seems people were so burned by stocks over the past 6 years that they are now buying Bonds and bond funds (where smart banks offload risky loans) with the same lack of a clue that they were buying B2B internet stocks in February 2000! BULLISH
Rising Rates:NEUTRAL: Bob and I seem in agreement that the Fed is only normalizing rates. This means they are going up but it really doesn’t count because they are going up to where they should be if we had not had a 9/11 attack AND a major recession.
High Inflation:NO WAY!. BULLISH As long as there is an internet connecting China and India to the US, I don’t see wages being in danger of high inflation. I betcha we solve our heath care problems by importing more doctors from China and India which would really be something.
Rapid Growth: BULLISH: People now are worried we will fall into a recession while ECRI is predicting slow but steady GDP growth.
Over Valuation: BULLISH: I wrote in my most recent newsletter for 2006, S&P estimates “as reported top down earnings" that include options expensing, law suit settlements and other write offs will be $80.51 (last month $82.57) for a forward PE of 14.2. The trailing PE is only 16.9. While the market was giving a PE of 28 in 2000 today it is giving a PE of half that!

What do you think? Did I make a mistake on any of these five indicators? I have 4 at bullish and 1 at neutral.

Please don't reply here. This forum is not for discussion. Please post your questions and commentary HERE. Thanks

-- posted by Kirk

http://www.bobbrinker.com/order.asp

Top 732. May 8, 2005 9:12 PM

» David_Korn - Analysis of Bob Brinker's Timing Model by David Korn

Excerpt from David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.

This is an excerpt from my newsletter from a few weeks back in which I, along with some guest editorialists, analyzed Bob Brinker's stock market timing model. I think we hit the nail on the head. For those of you who follow Bob's timing model, I think you will enjoy this.

BOB BRINKER AND HIS STOCK MARKET TIMING MODEL

The recent market weakness has prompted several of my subscribers to ask my opinion on whether I thought Bob's timing model has or is about to turn bearish. In my opinion, the answer to both those questions is no. I thought I would use this weekend's newsletter to provide some analysis to back up that opinion.

ROOT CAUSES OF A BEAR MARKET

Back in the days when the secular bull market was coming to an end, Bob was asked how he would know a bear market was coming. At that time, Bob discussed the five factors or "root causes" as he refers to them that foretell a bear market. Those five root causes include the following: (1) tightening monetary policy by the Federal Reserve; (2) rising interest rates (especially short-term rates); 3) rising inflation; (4) rapid economic growth; and, (5) over valuation in the market.

If you look at the foregoing five factors, there is some cause for concern. Certainly we have a tightening monetary policy by the Fed, although thus far it has been to "normalize" rates, so they haven't gone overboard yet. We do have rising short term interest rates. The remaining three factors, however, seem to be ok. Inflation (so far) remains benign, although we will get some additional data on that later this week when the Producer Price Index and Consumer Price Index are announced on Tuesday and Wednesday, respectively. We haven't seen rapid economic growth, as evidenced most pointedly by the jobs growth, and GDP. Finally, the market's valuation is not excessive, especially in light of the recent correction.

I always think its interesting to get other opinions on these types of issues, and Kirk Lindstrom, who is a bit of a Brinker historian himself, gave me his permission to include his thoughts on these factors as well. Let's see what Kirk has to say:

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GUEST CONTRIBUTOR #1
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Title: Analysis of the Five Causes of a Bear Market
Author: Kirk Lindstrom (with editorial comments by David Korn)

Kirk: In my opinion, I don't expect a sell-signal soon from Bob Brinker. In Brinker's January 2000 Marketimer, he published his "Five Root Causes for a Bear Market" which included: (1) Tight Money; (2) Rising Rates; (3) High Inflation; (4) Rapid Growth; and (5) Over Valuation. In January 2000, Bob adopted a tactical asset allocation and moved 60% from equities to cash because of:

1. Tight Money: Bob said the Fed was reducing M2 to slow growth -- BEARISH Indicator

2. Rising Rates: Bob was predicting higher long and short term rates to continue. This did not happen, but it was BEARISH for his model.

3. High Inflation: Bob said the CPI was approaching 3% and import prices were up 5% which would further impact inflation. We didn't get high inflation, but this was BEARISH for his model nonetheless.

4. Rapid Growth: Real GDP growth was approaching 5%. Bob felt the Fed would use rates to try and slow this. This was BEARISH and correct.

5. Over Valuation: According to Bob's newsletter, he wrote, "We believe valuation levels in the U.S. market are stretched to the limit." Another BEARISH indicator.

All 5 of his root causes were BEARISH at that time.

EC: For a while, if you requested a complimentary back issue of Marketimer, Bob would send his January 2000 newsletter. I suspect he is using a more recent one by now, but nevertheless, you can request a complimentary issue by going to this link:

Kirk continued: Although all of so-called "root causes" of bear markets were bearish in January 2000 according to Bob, how do they stack up now? Let's look at the 5 root causes today:

1. Tight Money: You are kidding right? They will give a loan to buy a home with zero down. To me, it seems people were so burned by stocks over the past six years that they are now buying bonds and bond funds (where smart banks off load risky loans) with the same lack of a clue that they were buying B2B internet stocks in February 2000! I rate this BULLISH!

2. Rising Rates: Bob and I seem in agreement that the Fed is only normalizing rates. This means they are going up, but it really doesn't count because they are going up to where they should be if we had not had a 9/11 terrorist attack AND a recession. I rate this NEUTRAL!

3. High Inflation: As long as there is an internet connecting China and India to the U.S., I don't see wages being in danger of high inflation. I rate this BULLISH!

4. Rapid Growth: People now are worried that we will fall into a recession while the pros at ECRI are predicting slow but steady GDP growth. I rate this BULLISH!

DavidK EC: The "ECRI" Kirk is referring to is the Economic Cycle Research Institute which Bob references on the show occasionally. Keep tabs on the latest news from the ECRI at their web site here:

http://www.businesscycle.com/

5. Over Valuation: I wrote in my most recent newsletter that for 2006, S&P estimates "as reported top down earnings" that include options expensing, law suit settlements and other write offs will be $80.51 (last month $82.57) for a forward PE of 14.2. The trailing PE is only 16.9. While the market was giving a PE of 28 in 2000, today it is giving a PE of half that. I rate this BULLISH!

EC: You can learn about Kirk's newsletter at the following url:

http://tinyurl.com/3mb7h

Kirk conclusion: My "interpretation" as David likes to say, is that four of the five factors that Brinker says cause a bear market are bullish, with only one neutral. My conclusion is that this is only a correction and will not turn into a full-fledged bear market. Don't expect a sell signal from Bob Brinker at this time in my opinion.

EC: Thanks Kirk for the analysis! Kirk Lindstrom is the editor of "Investing & Personal Finance" at Suite101.com. Its a great web site full of lots of financial information. Check out Suite101 at this url:

http://www.suite101.com/welcome.cfm/inve...

David Korn: The "root causes" of a bear market is the starting point for Bob's analysis. Bob also analyzes the history of past markets to see if their is historical evidence to support a bear market. In addition, Bob examines trading volumes, the cumulative advance/declines, new highs and new lows, all of which falls in the realm of technical analysis, although Bob says he does not use "charting" to predict the future. Finally, for Bob to actually adopt a risk-averse position in equities, that decision is made according to the dictates of his "long term stock market timing model." To answer the question of how Bob's timing model might be looking right now, I consulted with SteveT, one of my charter subscribers and also a Brinker historian of sorts.

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GUEST CONTRIBUTOR #2
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Title: LTSMTM UPDATE
Author: SteveT (with editorial comments by David Korn)

Introduction.

SteveT: LTSMTM, what the heck is that? Any long-term Trekkie already knows - its an acronym for Bob Brinker's Long Term Stock Market Timing Model. Mr. Brinker's timing model has four major components, all with approximate equal weighting. They include: (1) Valuation; (2) Monetary policy; (3) Economic; and, (4) Sentiment. In one sense, it is a simple, yet logical model. It is designed to be bullish when the outlook for the economy and corporate profits are optimistic, and bearish when the reverse is true.

Before I discuss my current views on the individual components of the model, allow me to introduce myself and share some ideas with you about Bob's methodology.

My name is Steve and I had been listening to Bob Brinker for well over a decade. At one point, I even posting notes I took of Moneytalk on the Internet where I met other Brinker-o-philes and where I ultimately connected with DavidK and now leave the commentary up to him. In recent years, I have been somewhat disillusioned with Bob, more so over the way he has reacted toward bad recommendations and treated others than anything else; nevertheless, I remain very curious as to how history will judge him. Perhaps my curiosity stems from wanting to see whether Bob will be able to successfully time the market, or whether his LTSMTM will go the way of his short-term timing model --you know, the one that was used to identify the QQQ trade in the fall of 2000.

A while back I got to wondering what causes Bob's model to change from bullish to bearish or bearish to bullish. Is it simply his personal expectation for future market returns? Does he really have a "model" that he completely relies on? Over the years, certain things kept coming up repeatedly that led to a hunch on my part about "the model." I have looked back in time trying to identify what triggered a change in Bob's model and I believe I am on to something.

I have written in the past about how I thought Bob viewed his “model” at that particular point in time and how I believe the “model” is constructed. We all know Bob looks at numerous indicators and the “model” is quantitative and does ultimately depend on Bob making a subjective judgment at some point to alter his allocation. The “model” was originally entirely comprised of fundamental analysis indicators. After Bob made a major mis-timing move, getting out of a bull market in 1988 and not becoming fully invested again until January 1991 when the DOW was some 20% higher, he added the Technical analysis component. Technical analysis ("TA") relies on things happening a certain way because they acted that way before under the same conditions. Detractors often say TA is not reliable since things are never exactly the same as they have been in the past. In one sense, Bob’s “model” in entirely technical analysis since he is relying on things falling into place this time because they did previously. You can see how it is easy to go in circles trying to follow this stuff. I will say having a model to study does have the advantage of partially eliminating some of the emotions we all face at the tops and bottoms of the market cycle.

We all know from listening to Bob on the radio that he claims to be able to know when to be in the stock market and when not to be. I believe Bob's model is simple but logical. Everyone knows the stock market is uncomfortable with things like inflation and a tight money supply. We also know that trees don't grow to the sky, and there is a limit to how much people will pay for the prospect of future earnings. When economies grow to fast and future inflation fears arise, interest rates will increase and that has historically put pressure on share prices.

It has been said that the stock market is a discounting mechanism. It tries to anticipate what a stock or group of stocks will be worth 6-12 month down the road. In the interim, volatility can move stock prices widely, offering opportunity for both buying and selling of stocks at favorable prices. Or at least that is the theory.

Methodology.

I have always believed that Bob has a great deal of respect for valuation. Every Monday when he examines his model, I believe Bob starts by calculating the current P/E ratio of the S&P 500 -- the Index which Bob says his current timing model tracks. Determining the market's valuation can be a daunting task since there are many methods to choose from. We do know the stock market is a forward looking device. Based on Bob's past statements, I believe he looks at forward operating earnings.

In going back to look at what makes his model tick, I found it practical to use actual earnings for the period in question. This minor adjustment would cause my figures to fluctuate from the actual numbers Bob may have used.

I believe after making the initial P/E calculation, Bob compares that to the P/E of the FED model. What is that you say? Simply put, you take the yield of the ten-year Treasury bond and divide that by 1. For example, if the current yield is 4.75%, you use the formula (1/ 4.75)*100 = 21.05. If the current P/E is below 21.05 the market could be deemed undervalued and if over 21.05 it could be classified as over valued.

Throughout his history, Bob seems to be fixated with catch phases that he uses. One example, would be that his model "projects an increase of 10% to 20%" or "up to 20% or more." Do you ever recall Bob saying things along these lines? I believe when the P/E calculation Bob makes every Monday is between 80% and 120% of the FED model P/E he calls the valuation indicator neutral. When below 80%, it is bullish and when above 120% it is cautionary. Taken to the extreme, when above 150% it could trigger a sell signal no matter what the other indicators tell him.

DavidK EC: Bob has been consistent in saying that his model is "either bullish or bearish." In other words, there is no in between which suggests that he might actually assign a number based on the data points which triggers the decision to issue a buy or sell recommendation.

SteveT continued: It is important to separate historic valuation from current valuation. Bob's method allows you to stay invested in equities when valuations are high historically, provided we are in a low interest rate and low inflation environment. You might be tempted to go back to the 1988 to 1991 and check this theory. I'll save you the trouble. It doesn't jive, but remember Bob's timing model failed during that time, and he allegedly changed it after wrongly exiting a bull market in the late 1980s.

After making the first calculation, I believe Bob quickly reviews the other segments of his model. My guess is that he starts with the Monetary policy indicator, followed by the Economic indicator. Then, he finishes up with his newest indicator, Sentiment, which seems to be evolving to this day. I suspect that even if the last three indicators were in conflict with the Valuation Indicator, Bob would still be hard pressed to announce a change in his model outlook. In fact, I believe he uses these secondary indicators to confirm what the Valuation Indicator is saying. He may even look to these secondary indicators to pick a precise time to pull the trigger.

Bob often references the five root causes of bear markets. Those being; tight money, raising rates, raising inflation, rapid growth, and over valuation. As of today I don’t think anyone would claim money is tight. M-2 money supply is growing nicely and anyone desiring credit or mortgages does not need to spend much time searching. The Fed Funds rate has risen 1.75% in the past nine months while the ten-year treasury yield has barely moved. It seems we are all waiting to see where the FED stops. This is something I am sure Bob will be monitoring closely in the coming months.

Inflation is creeping back into the picture but for now is not out of control despite the pain we all feel when we fill our gas tanks. Final Fourth Quarter 2004 GDP was expected to come in at 4% but actually finished at 3.8%. This indicates an economy humming along in the sweet spot and in no danger of overheating. Valuation is certainly reasonable, with 2005 forward P/E coming in at slightly above 17 using Bob’s $69 as the earnings guess. Considering the inflation environment one could hardly make a case for over valuation. All in all, I can see why Bob’s last newsletter implied that further gains in the U.S. stock market are expected this year and he fully expects new cyclical bull market highs and his model is not anticipating becoming bearish anytime soon.

The art and science in all of this, is trying it assimilate the information and determine which indicators deserve the most weighting at any particular time. With that said, and with DavidK's help, let's look at the individual components of the model with an eye toward how they might translate today.

MODEL ANALYSIS

VALUATION INDICATOR

SteveT: Bob is still predicting S&P 500 earnings of $69. This is among the lowest predictions I’ve seen. Standard and Poor's is suggesting $75.06 as of early April. This weekend while pinch-hitting for Bob, the guest host Larry Kudlow suggested $78 in earnings! Now, we all know that Larry Kudlow tends to be terminally optimistic; however, I wonder if Bob deliberately diminishes his earnings estimates to protect him from being overly optimistic when he believes we are in a secular bear market. Considering past history in times when rates have been where they are now, a P/E in the high teens is very reasonable. Using Bob’s estimate of $69 and the S&P 500 close Friday of 1142.62, this gives us a P/E of 16.55. Using S&P estimates of $75.06, you get a P/E of 15.22. If you use the FED model you could call 23 a reasonable P/E. I believe this is the number one reason Bob is optimistic about equities this year. After a sluggish 2004 and most of the yearly gains coming after the election, it is not surprising we have had a slow start to 2005. After being range bound maybe it is time for the next upward leg of the bull market. I rate the Valuation Indicator as bullish.

DavidK EC: Bob Brinker tracks the P/E ratio of the S&P 500 when analyzing the valuation component of his timing model. Steve is right about Bob's estimate of $69 for calendar year 2005 being on the low side. Using today's closing price for the S&P 500, that would translate into a forward P/E ratio of 16.60. Bob has pointed out that the average P/E ratio for the market when we have periods of low inflation comes in around 18-1/2. Keep in mind that is a historical average during periods of low inflation. If earnings continue to improve, and inflation remains benign, the market can afford the types of valuations we presently have. I agree that the Valuation Indicator as Bob tracks it is bullish.

MONETARY POLICY

SteveT: Monetary Policy is something most of us are watching to see when Alan Greenspan and the FOMC pause on increasing short-term rates. It is widely know the short-term objective of the FED is to try to get rates closer to a normal range. This will allow them the flexibility to lower rates should it become necessary to stimulate the economy if we slow down. After lowering rates to levels most of us have never seen in the post 9-11 era, we all knew rates were going up. Right now, the unanswered question is whether the lower rates and tax cuts stimulated the economy enough to trigger inflation. So far so good; however, it remains to be seen if the FED will take a break in rate hikes this summer or inflation will become a real threat. For now the Monetary Policy Indicator is bullish.

DavidK EC: Bob follows the monetary supply to determine the necessary liquidity for continued expansion in the United States economy. Bob has referred to the M-2 money supply as "the fuel of our economic growth." You may have noticed that Bob has been discussing monetary policy more and more frequently on the shows of late. I think (like Steve pointed out), all eyes (including Brinkers) are on the Fed to see what they are going to do with interest rates after they are "normalized." The biggest fear that Bob has relative to this indicator, is that the Federal Reserve will overreact to headline inflation and raise interest rates more than they need to. For now, I think this indicator is bullish, but the scale could be tipped rather quickly if the Fed does something unwarranted.

ECONOMIC INDICATOR

Stevet: The Economic indicator is composed of the GDP, which is a measure of our economic growth. I believe Bob looks at the direction and rate of growth as a key to future earnings growth. I have a hunch he also looks at productivity as a way to see just how much growth we can enjoy without inflation becoming a problem. The goal is to keep GDP around 4% so we can enjoy maximum growth without having to worry about inflation and increasing rates. As of this moment, I think the economic or business cycle is no doubt in the bullish camp. Calendar year 2005 growth is expected to be a steady 3% to 4%. Productivity has helped even out the higher costs of energy. Housing is still decent in most regions of the nation, helped by low mortgage rates. I rate the Economic Cycle Indicator as bullish.

DavidK EC: Steve is correct in that Bob focuses on the growth of real gross domestic product in this category. At one time, Bob has also mentioned that "forward earnings momentum" and "economic momentum" comprise this indicator. What is important relative to this indicator is the rate of growth in the economy. At the beginning of this year, Bob raised his projection of GDP growth by 0.5% to a range of 3% to 4%. Fourth quarter GDP last year, rose 3.8%. On April 28th, we will get the first look at GDP for the first quarter of 2005. So far, GDP is looking like it is falling within Bob's projections which helps put this indicator in the bullish camp.

SENTIMENT INDICATOR

SteveT: Analyzing sentiment is something that Bob added to his “model” after the poor performance he suffered in the 1987 to 1991 time frame. I think he really struggles with this indicator. When I first recall him mentioning it, the primary data point was the Investors Intelligence four week moving average of Bulls/Bulls + Bears. At another time, Bob said the indicator was revealing very little useful information. Other data points are the VIX, TRIN, and volume. Bob also looks closely at market internals such as advance/decline line and new highs/new lows. Lately he has mentioned several times the Put/Call ratio, both the 10 day and 60 day moving averages. This has shown a fair amount of bearishness since New Years which is actually a bullish piece of data. To be perfectly frank, I believe David Korn has a much better handle on this indicator than Bob does. As some of you may recall David did not act immediately and buy QQQ in October 2000 and also identified some inflection points primarily using his TA skills.

DavidK EC: While I thank Steve for the compliment, I must remind people that I am not always able to identify inflection points. It is certainly a goal of mine that I give my best effort to, but certainly not a perfect science by any stretch.

DavidK EC#2: Bob views Sentiment as a contrarian indicator. As Steve accurately noted, I believe Bob began with primarily the weekly poll of investment newsletter writers done by Investors Intelligence. Bob uses the formula bulls/(bulls + bears) to yield a percentage. When the number comes in between 50% and 70%, Bob views it as a neutral sentiment data point. When the number comes in under 50%, it is viewed as a bullish indicator as it means the majority of newsletter editors are out of the market, and the only way they can affect the market is by buying back into it. If the percentage drops to under 50% (after checking the other indicators) it often in the 1990's indicated a buying opportunity or as Bob said, a "Gift Horse Buying Opportunity." Again when it drops to under 50% that means that one or more of every two newsletter writers are bearish. They are out of the market when they should be buying. Bob has referred to the newsletter writers who are in the "Correction" category as "clueless" and do not factor into his calculations. When the number is over 70%, it represents a lot of bullishness among advisors, which is a dangerous level from a contrarian standpoint. Bob attempts to smooth out the weekly bumps by looking at the 4-week moving average of this percentage. Currently, the percentage of bullish advisors in the Investors Intelligence Survey is 46.2%, with the percentage of bears at 29.0%. Using the formula [(bulls)/(bulls + bears)], the sentiment ratio is 61.43%. The four-week moving average is 63.55%. Not a really great number, but better than it was in recent weeks when the four-week moving average was above 70%.

DavidK EC#3: The put/call ratio is looking extremely healthy from a contrarian perspective. The 10-day put/call ratio is 1.01, which I am sure Bob would rank as very bullish. In addition, the 60-day put/call ratio is 0.89, and Bob has called this indicator bullish, even when it was as low as 0.78.

SteveT: I believe that as time goes by, Bob has learned more about technical analysis and added other data points to this Indicator in an attempt to diversify and avoid mistakes. During the panic of autumn 1998, Bob started talking about other indicators such as the Put/Call ratio. It was also then he seemed to key in on market internals such as new highs/new lows, advance/decline, volume, etc. He liked to see the market make a bottom and then drift higher, then retest the low on lighter volume. The theory was that those that were going to sell already did and that only left buyers left to move the market. Overall, I think it is safe to say that the Sentiment Indicator is bullish.

DavidK EC: In recent times, it appears Bob added the TRIN and the VIX to the mix and there are quite a few more. I agree with Steve in that the combined results of all these Sentiment Indicators is bullish. Every couple of months, I do an extended version of the sentiment data so look for it some time in the near future.

CONCLUSION

SteveT: At this time I don’t see anything to be alarmed at. I feel Bob would view the past six weeks as a normal health restoring correction in an on going bull market. The economy is doing fine and doesn’t look like a major slowdown will appear anytime soon. This bodes well for earnings, which should offer some protection against steep drops in the stock market. In fact it very well could result in valuations becoming very attractive and signal an out right buy for those holding stock market cash reserves. Monetary policy will be under close scrutiny by the major media and should things change drastically we all will know. For now, things are accommodative. Sentiment is bullish but keep your eyes on this one since it can change quickly. I make it 4 for 4 in the bullish camp which means time for Brinker followers to be fully invested.

Final Thoughts from SteveT: So there you have it. Use this information at your risk or not. Record the numbers and make up a spreadsheet like I did to track the model components and see what you come up with.

DavidK EC: I agree with Steve and believe Bob is still bullish on the market. I want to thank Steve very much for sharing his views on Bob's long term timing model and the market. I welcome comments from any of you concerning this discussion of Bob Brinker's long term timing model. Once again, thanks for contributing Steve!

FINAL THOUGHTS FROM DAVID KORN: If you would like to learn about my service, visit the Bob Brinker Fan Club Hosted by Suite101.com

- David Korn, editor of http://www.BeginInvesting.com

DISCLAIMER: I am not associated with ABC Radio Networks, Moneytalk or Bob Brinker and this service is neither sanctioned by, nor written under the auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is not a substitute for listening to Moneytalk, it is only my interpretation and commentary of some of what is discussed on Moneytalk, along with additional educational information that I include, editorial comments about the market and helpful financial links. I also provide my own stock market commentary to subscribers as part of my service and give them access to my web site, www.BeginInvesting.com. If you want to know what was said verbatim on Moneytalk, listen to the show live or subscribe to "Moneytalk on Demand" which allows you to listen to the show in case you missed it live. The web site, bobbrinker.com has all the links to the ABC Radio Network stations that broadcast the show live. The information contained in this newsletter is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security. This newsletter is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright David Korn, L.L.C. 2005.

-- posted by David_Korn

http://www.chartoftheday.com/20050518.ht...

Top 733. Jun 26, 2005 9:19 AM

» David_Korn - Bob Brinker's Moneytalk (summary and commentary)

Here is an excerpt of my newsletter from last week. Enjoy!

Excerpt from David Korn's Interpretation of Moneytalk (Bob Brinker Host)

June 18-19, 2005 Newsletter

CYCLICAL BULL MARKET CONTINUES AND BOB'S CURRENT ADVICE

Brinker Comment: Bob told his listening audience that said since March 11, 2003, his conviction has been that we are in a cyclical bull market. That is important because it means we are in the midst of a major money making opportunity. As we speak, despite the whining bears who have been dead wrong, the S&P 500 has made another new recovery high closing at 1,216.96. That brings the total return for the S&P 500 since the lows of March 2003 to 52%, not including dividends. If you include dividends, the total return is about 55%. How sweet it is!

Caller: This 57-year old caller has $100,000 in cash and he thinks it should be invested in the market and wants to invest in one of Bob's Model Portfolios. Bob noted that you want to pick a model portfolio that is consistent with your risk tolerance. At age 57, you would generally not choose Model Portfolio I because that is designed for the aggressive investor. Bob noted that he is positive on the market at this time, but as far as adding new money into stocks now, Bob has not encouraged people to chase the market. When the S&P 500 was around 800, Bob recommended buying into the market. Last year, Bob looked for weakness and recommended looking for the S&P 500 below 1100. There were 25 opportunities between June and October of last year when the S&P 500 got below 1100. That was an opportunity to add on weakness. This year, again Bob recommended investing new money in when the S&P 500 went below 1160, which it did on a closing basis on May 12th and 13th and provided another opportunity to invest at a beneficial level. That has been Bob's approach, not to "chase the market." At these levels, Bob recommends dollar cost averaging into the market over time on a monthly basis. This is Bob's philosophy. You try to put a lump sum of money into the market on weakness. Now, with the market at the highest level its been during this cyclical bull market, is the time to adopt a gradual approach to putting your money to work.

EC: It is nice to see Bob be clear in his advice. In addition, his timing efforts this bull market have been excellent. Bob is officially in dollar cost average approach for new money, and I suspect he will stick with that recommendation until we have another significant correction (if we have one). Bob made one minor error in that we are a little shy of the highest level for this cyclical bull market, although not by much. In fact, the S&P 500 is less than 10 points away from its closing cyclical bull market high, which occurred on March 4, 2005, when the S&P 500 closed at 1,225.31.

OIL AND INFLATION

Brinker Comment: There is a lot of talk about the price of oil which reached an all time record closing level in nominal terms (today's dollars), not adjusted for inflation. The price of light sweet crude for July delivery closed at $58.47 on the New York Mercantile Exchange. This is the kind of oil that gets run through the refineries to produce gasoline which is so widely consumed by the U.S.

Even though this is the highest closing price of oil in the recent run, we are nowhere near the level to match the previous "real" high, as adjusted for inflation which occurred in 1981. If it were adjusted for inflation, the price of oil would have to go to $90 a barrel to reach a record high.

The oil price spike in 1981 was precipitated by a crises in the Middle East and here we are again, with war in Iraq and problems in the axis-of-evil states. In the late 1990s, the price of oil, adjusted for inflation, went as low as about $14 a barrel. When you consider the run up to the current price of $58, that is a big deal, as the price has quadrupled. People who are dependent on oil in their every day lives are being impacted. Certainly, the transportation industry, airline, truckers, etc. are being hurt by higher oil prices. Nevertheless, Bob said oil has not impacted the economy as much as it did 30 years ago when we had the oil embargo.

EC: A picture is worth a thousand ECs and the folks over at ChartofTheDay have a chart out this week showing the price of oil inflation-adjusted since 1970. The chart illustrates that most oil price spikes were a result of Meddle East crises and often preceded or coincided with a U.S. Recession. Worth a look in my opinion at the following url:

Brinker Comment: We got the Consumer Price Index (CPI) report for the month of May this past week. Bob pointed out that the price of oil was declining during the month of May which helped lower the CPI. For the month of May, the CPI decreased 0.1 percent. Energy was the real mover in that report, down 2.0% for the month. The "core" rate of inflation, after being unchanged in April, rose only 0.1% in May. Year-over-year, the CPI is only up 2.8%, and it doesn't get much better than that. It had gotten up to 3.5% in recent months, but is back down to what Bob referred to as a "very very low number." Core inflation, on a year-over-year basis, is up 2.2% and remains "benign." Food prices are only up 2.4% on a year-over-year basis and have behaved very well.

EC: Read the CPI report for May at the following link:

http://stats.bls.gov/news.release/cpi.nr...

Brinker Comment: The components of the CPI that are going up faster than the entire rate should come as no surprise. Energy prices are up 9.9% on a year-over-year basis and for the three months ending May, energy is up a whopping 28.7% on an annualized basis. Transportation, which is impacted by energy, is up 4.2% on a year-over-year basis. Medical care continues to be a big contributor to consumer prices, and was up 4.3% on a year-over-year basis. Housing is only up 3% on a year-over-year basis. Many people think the CPI understates the cost of housing because they use a rental equipment formula. However, Bob said there are signs that we are seeing a "cooling off" in housing price appreciation. There is some evidence of pricing levels topping off in Beverly Hills, California. Looking forward, with energy prices on the rise, it could be a big contributor to the June CPI.

EC: Remember two weeks ago I referenced the "Future Inflation Gauge" tracked by the Economic Cycle Research Institute (ECRI) which had reached a 10-month low? Looks like that indicator has been on the mark lately. It will be interesting to see if the upturn in the price of oil is reflected in the next projections from the big FIG Newton.

Brinker Comment: There is still a couple of weeks left in June during which oil prices could jump around some more. Bob referenced a recent guest to Moneytalk, Charlie Maxwell, who some think is the number one oil analyst. Mr. Maxwell said that he thinks that oil could remain in the 40s to 50s for some period of time; however, he believes that it will eventually go higher. Bob noted that it still is in the 50s, but close to breaking out. Mr. Maxwell said when oil does break out, it will break out to the upside.

EC: It will be interesting to see if Bob stops criticizing the people who have been predicting much higher oil prices. You may recall that Bob for a while was predicting that oil would not even go back into the $50s. He then gave the analyst from Goldman Sachs who was predicting a spike in oil above $105 a lot of grief on the show and scoffed at the notion that oil would ever go near that high. Well, now that oil is almost to $60, and one of his guests is predicting even higher oil prices, do you think Bob will change his tune? My bet is we get the "BH" -- a/k/a the Brinker Hedge. If oil falls back down, he can say "I told you so." On the other hand, if oil goes up, he can point out that this is exactly what a special guest on his show said. Either way, the BH makes the BB look just dandy!

Caller: Are you saying that oil will have to go to $90 a barrel before it presents a problem for our economy? Bob fumed a little and said he never said that. In fact, go to any airline and they will tell you that the price of oil is a problem right now. Oil prices have been a problem for a long time now for people in the transportation business. The caller said oil in the $50s is a problem for most people. Bob said oil at $58 is a problem, but it is not as big a problem as people expected. The fact remains that we had high oil prices in the first quarter of this year and we still had 3.5% real GDP growth. The caller noted that many farmers are getting hard hit, and would like to see oil go back to the $20s. Bob retorted that this is exactly why he mentioned food prices when analyzing the CPI and said that he was glad to see food prices up only 2.4% on a year-over-year basis.

Brinker Comment: Our economy grew at a 3.5% clip in the first quarter as measured by GDP which Bob refers to as the "sweet spot." We don't want an overheated economy. The growth that we have had keeps us from excesses in inflation, job growth and bottlenecks in the economy. We don't want a "boom" economy because they always lead to busts.

EC: Both the GDP and Inflation are important components that factor into Bob's long-term stock market timing model. As it stands right now, both GDP and inflation are looking good, which I think is part of the reason that Bob remains bullish at this juncture.

Brinker Comment: Bob said he doesn't know anyone with any credibility that is expecting to see oil in the $20s anytime soon. Bob said it seems extremely unlikely to expect that kind of move. What is going on in the oil market is reflecting uncertainty in the oil pits. On Friday, there was a rumor of a terror threat in Nigeria. That is a big deal when it comes to oil because Nigeria is one of the primary supplies of light sweet crude -- which is the oil that gets to the refineries to make the gasoline that we all want. When you get a terror threat rumor floating around on the New York Mercantile Exchange on a Friday where it is a summer-type atmosphere, you can expect this kind of volatility. We import 1.1 million barrels of oil a day from Nigeria. Virtually everyone of those barrels translates into gasoline for U.S. consumers. Remember, we consume about 45% of all the gasoline that is consumed in the world.

Our voracious appetite for gasoline is supposed to be one of the reasons that oil prices are going up. The other nation to blame is China. However, Bob noted that Chinese oil imports declined in the first five months of 2005 by 1.2%. That was not expected. Traders in the oil pits on Friday simply became paranoid that Nigeria would be hit by a terror attack and that would create more problems with oil prices. If we continue to get these types of stories, you can expect further pressure on the price of oil. The good news is we are using much less oil as a percentage of the gross domestic product than we did 20 years ago. Of course, when you see these huge numbers in our trade gap, a lot of that is caused by our imports of oil.

EC: Another reason given for higher oil prices of late, was the Energy Department's weekly petroleum report which showed that gasoline demand in the U.S. has averaged nearly 9.5 million barrels a day over the last four weeks which is 3 percent above the same period last year

Caller: At the time of the last oil crises, the country of Brazil couldn't afford gasoline, so they started producing biofuel for motor vehicles which was alcohol, derived from the suger-cane they grow (a/k/a ethanol). Now, their cars have a switch that allows them to run on gas or ethanol. Why can't we do what Brazil has done? Bob expressed his frustration over the fact that the U.S. has not addressed their dependence on foreign nations for petroleum. Where is the leadership on conservation? Politicians apparently consider the term "conservation" as poison.

EC: The caller is right. Today, about 40% of all fuel the Brazilians pump into their vehicles is ethanol, compared with about 3% in the United States. The LA Times has an article out this week entitled, "Homegrown Fuel Supply Helps Brazil Breathe Easy." Its an interesting article, and I must confess my own ignorance until I read this article over how far Brazil has come on this front. Read it here:

http://tinyurl.com/7h2aw

Caller: This caller said he doesn't think too many people understand or are aware of our nation's Strategic Petroleum Reserve ("SPR"). Bob agreed. Generally, the SPR is only supposed to be used during national emergencies. We used it once under Bill Clinton. We haven't really seen it used by George W. Bush. In fact, the SPR is almost topped off. There is no indication that our administration will use it to impact the price of oil. If we did, it might have a short-term effect, but probably not the longer-term effect. Bob noted that the SPR only covers about 65 days of our entire nation's import of oil. In addition, it cost about $21 million to administer the SPR and there is quite a government bureaucracy just to maintain it.

EC: The Strategic Petroleum Reserve is our nation's emergency supply of oil stored in enormous underground salt caverns along the coastline of the Gulf of Mexico. Just last week, Secretary of Energy Samuel Bodman announced that the planned fill of the SPR will be complete in August, when the SPR reaches 700 million barrels of oil. More about the SPR at this link:

http://tinyurl.com/7po66

MORTGAGE AND PROPERTY QUESTIONS

Caller: This caller took out an "interest only" mortgage on a house that cost $184,000 because he is only going to be in the house for 28 months while he attends school. Did he do the right thing in purchasing a house for this short period of time? Bob said the first computation to do, is to figure out how much you would have paid if you had rented during this time. Based on what the caller said, Bob figured that it was pretty much a wash in terms of the out of pocket cost for renting versus purchasing the house, and as long as the property did not decline in value after the sale (including commissions), it would be ok to have purchased the house and taken out that loan.

EC: Bob generally recommends against interest-only loans, unless you are know that you are only going to be in the property for a very short period of time. Otherwise, you face the risk of interest rates rising. In this environment where long-term interest rates are very low, Bob likes to put the risk on the banks who are lending the money.

EC#2: A mortgage is "interest only" if the monthly mortgage payment does not include any repayment of principal for some period. Thus, during the period you are paying only interest, the loan balance remains unchanged. Can you handle an interest only mortgage? If you aren't sure, check out this article that attempts to answer the question for you:

http://tinyurl.com/8zf9z

Caller: This caller has rental property in Florida and is thinking of selling it to take advantage of high real estate values, plus he is a little gun-shy after all of the hurricanes to hit the Florida coast. He bought the property 15 years ago at $89,000 and he can sell it now for about $230,000. There is no mortgage on the property It is a single-family home in a great neighborhood. The net rental per year is about $7,000. Bob noted that if the caller could live in the property for two years as his principal residence, he could take the gains tax free. The caller said he had no plans of living there, which Bob wasn't too thrilled about, noting that he would then be obligated to pay 15% taxes on the gains as a rental property, plus any adjustments for depreciation expenses. Bob urged the caller to seriously consider making the rental property his principal residence for two years to avoid the tax consequences.

EC: For people who have a second home, here is an article entitled, "Selling that vacation home: How to avoid capital gains tax" which you can access here:

http://tinyurl.com/a998w

Caller: This caller is considering purchasing a resort timeshare Villa in Cancun, Mexico for $35,000 which entitles her to access it one week per year. Bob noted that this would give the property the equivalent value of $1.8 million! Bob asked what you get for this? The caller said it was a one bedroom, one bath, and Bob said he couldn't believe what he was hearing. Bob said he would rather be the seller, not the buyer. Think of what you could do with $35,000. This could buy you quite a few weeks in Cancun. Even if it cost you $3,500 to stay at a first class hotel, you could do it for 10 years. Moreover, you could put the $35,000 in a fixed-income investment and since you aren't going to use all the money at once, the income you generate could be used for other purposes. The caller said she was also looking it the timeshare as an investment that could pay off down the road. Bob said if it was a stand-alone unit, he could understand; however, the historical resale value of timeshares has not been pretty.

EC: Here is a link to the "Timeshare User's Group" web site:

http://www.tug2.net/reviews.shtml

YIELD CURVE

Caller/Brinker Comment: A caller brought up the point that short term and long term rates are getting pretty close. Bob noted that there is still in excess of a 100 basis point spread between short and long rates. Although historically, an inverted-yield curve is something to get your attention, at this juncture we don't even have a flat yield curve, much less an inverted yield curve.

EC: Two weeks ago, I referenced the seminal 1996 article written in the Journal of Economics and Finance, entitled, The Yield Curve as a Predictor of U.S. Recessions. For a more recent analysis of the current yield curve, check out this site which has some interesting views on the issue:

http://tinyurl.com/a6h2y

MUTUAL FUND, INDEX FUND AND EXCHANGE TRADED FUND QUESTIONS

Caller: This caller is invested in poor performing mutual funds and wants to know what kind of funds Bob would recommend. Bob said their are mutual funds that track index funds and even exchange traded funds that track the indices. Bob mentioned the S&P 500 Index Depository Receipts a/k/a "Spiders" which trade under the ticker symbol, SPY. They have a very very low expense ratio and are very liquid. They track the S&P 500 Index and pay dividends on a quarterly basis. In fact, they just paid a dividend this past Friday of a little over 48 cents per share held. This represents the dividend paid by the S&P 500, less a very small expense ratio that comes out. There is also an exchange traded fund that tracks the Wilshire 5000 which trades under the symbol, VTI. It also gives you the dividend on a quarterly basis. In addition, you can purchase index funds through the major fund families.

Caller: If a fund reports a "total return" of 9%, but has a 1% annual expense ratio, does that mean you walk away with 9%, or do you get 8%? Bob said if the mutual fund company is claiming total return, that should mean the return including any expenses. However, that isn't he end of the story. Each shareholder has to compute his tax liability. If you are in a tax-deferred account, you won't know your tax liability until retirement. If you have the money in a Roth IRA and follow the rules, you won't ever have to pay taxes. If you have money in a personal account and hold the money long term, the maximum federal rate is 15%. When a mutual funds reports "total return" that is supposed to be the money earned (or lost for you) after expenses.

Caller: What does it mean if a mutual fund charges a 5.7% load? Bob said that is very sad. It means you paid 5.8% of your investment when you purchased it (known as a front-end load), or on the day you sell (known as a back-end load). This is an extremely high load. For example, if you invested $107,000, you would pay the fund $5,750 just in expenses. Unfortunately, the load funds often report the "total return" which does NOT include the load charge in the performance. That is why Bob only invests in no load funds.

EC: The U.S. Securities and Exchange Commission publishes a free periodical about mutual funds that I referred to a lot when I was first learning about investing. Entitled, "Invest Wisely: An Introduction to Mutual Funds" you can read it without paying any expense ratio at this url:

http://www.sec.gov/investor/pubs/inwsmf....

Caller: Why did the Vanguard Tax-exempt Money Market Fund have such a big decline in its yield? Bob said if you look at the tax-exempt funds in general, you can see what happened. A lot of the bond/tax anticipation notes that were issued by municipalities in anticipation of the tax money coming in was paid off. The yield was pretty ridiculous, and almost as high as the taxable money market fund which was a condition that could not last forever. The yield on that fund is now about 2.1% and on the taxable it is about 2.8%. It is still yielding about 75% of the taxable, so for people that are paying federal taxes above 25%, they are still better off in the tax-exempt fund, assuming no state tax liability. Right now, there is a more normalized relationship between the tax-exempt and taxable fund. Bob added that the tax-exempt fund is very high quality, with about 85% of its investments in the top grade paper.

EC: The Vanguard Tax-Exempt Money Market Fund (Ticker: VMSXX) is now yielding 2.09%. The Vanguard Prime Money Market Reserves Fund (which I use for part of my newsletter portfolio cash reserves) is yielding 2.84%.

MONEYTALK GUEST - DAVID L. SCOTT

On Saturday's broadcast, Bob introduced David L. Scott, author of the book, "Wall Street Words: An Essential A to Z Guide for Today's Investor." A synopsis of the salient points follows.

Brinker: Bob expressed his dismay that our educational system does little to teach students about personal finance.

Scott: Its not only in high school, but also at Universities and even in graduate programs that personal finance education is ignored. There are many students, even in business school, that don't have a clue about personal finances, credit cards and insurance.

Brinker: One thing that should be taught is the notion of expenses associated with investing.

Scott: Agreed. The majority of people who have financial difficulties, have them on the expenditure side, not the income side. People who make good income, still end up in financial distress because they do not curb their spending habits in a variety of areas.

Brinker: We had a caller who didn't realize that the load charged by the fund came out of the total return. What message did you want to send out when you published the book, "David Scott's Guide to Investing in Mutual Funds"?

Scott: Part of the problem is many people don't understand mutual funds, and therefore rely on the advice of the people selling their find which is not always advice given in your best interest. Part of what I try to do in my books is present complicated topics in an easy to understand way. I emphasize the importance of selecting a fund that meets your investment objectives, and minimizing fees. These are basic books on financial topics that people can understand.

Brinker: What do you think about "false prophets" who promise they can beat the market?

Scott: We all get greedy and we get caught up in the idea that we can beat the market, but its not easy.

EC: Note to Scott -- that's Bob's mission as a market timer.

Brinker: John Bogle expressed the idea that many funds as they get bigger, charge even higher expenses, when it should be the other way around.

Scott: Its sad but true. For example, the 12b-1 fee was designed to help a fund attract new investors. It hasn't worked out that way. As mutual funds have become more popular, the managers have found they can charge higher fees and get away with it.

EC: Here is a link that provides some good background information about 12b-1 Fees:

http://www.ici.org/funds/abt/ref_12b1_fe...

Brinker: Bob noted that David Scott had recently published a book entitled, "David Scott's Guide to Investing in Bonds" and then opened the phone lines.

Caller: This 54-year old caller wants to know if now is a good time to start investing in bonds?

Scott: Bonds have a place in most people's portfolios. Scott qualified his comments by admitting that he was wrong over the last year in that he thought interest rates were going higher. For most people, the way to buy bonds is through mutual funds. If you are wealthy, you can probably get individual bonds. Scott said that he still has been unwilling to invest in bonds or bond funds with long maturities. If you are going to invest, he would go with short or medium term maturities. Everyone can benefit from some bonds, it just depends on your age and need for income.

Brinker: What do you think has kept long-term interest rates down over this past year?

Scott: I think part of the reason is the foreign investment money that is flowing into U.S. Treasuries. Also, nobody is certain our country's economy is all that strong. I see nothing good about interest rates -- especially long-term rates. I am concerned about the balance of payments. I am concerned about the federal deficit. Basically, we have foreign investors financing our consumption. At some point in time, this will end and interest rates will go up. In fact, I thought they would have gone up by now.

EC: A rather grim outlook, but one that is shared by several other heavy hitters in the investment community. The Boston Globe had an article out last month entitled, "Are declining long-term rates in our best interest" which explores some of these issues. You can access it at this url:

http://tinyurl.com/8wmgm

Brinker: What do you think of the I-Bonds. The base rate is even beating the TIPS, and you get the tax deferral.

Scott: I like I-Bonds so much, I own some. They are very easy to buy and a good deal for investors. The tax is deferred until you cash in the bonds. Of course, you shouldn't put all of your money in them, but for fixed-income investors, they are a real attractive investment.

EC: I-Bonds earn 4.80% when bought from May through October 2005. I agree with Bob and David Scott. They are very attractive for a conservative fixed-income investment. Learn more about the current rate, and how to buy them at this url:

http://www.publicdebt.treas.gov/com/comi...

Brinker: What's your feeling on buying new issue bonds?

Scott: Its always better to buy new issues of bonds because the commission is absorbed by the seller not the buyer. However, if a broker calls me about a new bond and they quote what they think the rates will be -- especially if its a municipal bond -- I will always ask them to look in the secondary market to see if there are any better deals. There usually aren't, but once in a while if you are buying a small amount of bonds (like $5,000 or less), some broker dealers want to get rid of inventory because they don't want to hold a very small amount which can result in a great deal for you. Most of the time, however, you do want to try and get new issues if you can.

EC: Interesting piece of advice. That is something I never thought of, but I checked with a broker I know, and he confirmed that they will occasionally offer deals to get rid of the bond "crumbs" as he calls them. These are small dollar amounts, but can be exactly what an individual retail investor is looking for.

Caller: What do you think of closed-end mutual funds that can be bought like a stock and traded like a stock on the NYSE, for example Nuveen and Eaton? The caller said he has bought these closed-end funds using a discount brokerage account, and they offer him income, and many are insured.

Scott: It depends. If you buy stocks on the NYSE, you have to pay a commission and sometimes it would be better just to buy a fund. It also depends on what tax rate you are in.

EC: Frankly, I didn't think Scott really understood closed-end mutual funds, or he wasn't really listening to the question. The caller was referring to the Nuveen New Jersey Investment Quality Municipal Fund (Ticker: NQJ) and the Eaton Vance Tax-Managed Buy-Write Income Fund (Ticker: ETB). Here is a recent article about closed-end bond funds from TheStreet.Com which is worth reading:

http://tinyurl.com/b2hbf

EC: David L. Scott is a Professor of Finance at Valdosta State University. You can learn about him, and even e-mail him, by going to his home page at the following link:

http://www.valdosta.edu/coba/fac/acctfin...

FINAL THOUGHTS FROM DAVID KORN: I am starting a new subscription period to my newsletter shortly. If you would like to learn about my service and how to subscribe, visit the Bob Brinker Fan Club

- David Korn, editor of http://www.BeginInvesting.com

DISCLAIMER: This e-mail is neither sanctioned by, nor written under the auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is not a substitute for listening to Moneytalk, it is only my interpretation and commentary of some of what is discussed on Moneytalk, along with additional educational information that I include, editorial comments about the market and helpful financial links. If you want to know what was said verbatim on Moneytalk, listen to the show live or subscribe to "Moneytalk on Demand" which allows you to listen to the show in case you missed it live. The web site, bobbrinker.com has all the links to the ABC Radio Network stations that broadcast the show live. Copyright David Korn, L.L.C. 2005.

-- posted by David_Korn

Top 734. Jun 26, 2005 11:17 AM

» Kirk - Re: Correction - Crude Oil Price Link

.
I recommend those who follow Brinker use his active passive, low cost portfolio, or the better diversified 7 index fund portfolio in my newsletter or my even simpler Total Stock Market & Total Bond Portfolio I give for free here, then replace the QQQQ percentage Brinker recommends for P1, P2 and P3 with my newsletter portfolio. I think QQQQ is beatable and my results show it.

In response to Bob Brinker's Moneytalk (summary and commentary) posted by David_Korn:

Nice summary David but you have the wrong image linked. Here is the image you wanted:

For 2005, "Kirk's Newsletter Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8%

As of 12/31/05 the Total Return for "Kirk's Newsletter Portfolio" since 12/31/98 is Up 197% while the S&P500 only up 12%!!! & NASDAQ only up 1%!!! (my portfolio beta is roughly equal to that of QQQQ.)

What should be quite clear is a “buy and forget” market strategy using the DOW, S&P500 or NASDAQ would have under performed holding money funds over the past seven years while my newsletter portfolio nearly tripled every dollar invested.

-- posted by Kirk

Top 735. Jan 5, 2006 8:34 AM

» Kirk - Brinkers results for the year 2005

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This is a repost from Honey's Brinker Beehive--Not a Fan Club since it has Brinker's 2005 Results.

In response to Re: January 2006 Marketimer Model Update posted by honeyoneohone:

You posted from Basher52:

"Here are Brinkers results for the year 2005:
1 year ended 12-31-05 for all Model Portfolios:
Portfolio I: 6.4%
Portfolio II: 5.9%
Portfolio III: 5.3% (balanced portfolio with 50% fixed-income position)
Active/Passive: 6.9%
Total Stock Market Index: 6.0% (VTSMX)
S&P 500 Index: 4.8%
Here are Kirk's returns for the same year:
For 2005, "Kirk's Newsletter Portfolio" was Up 13.2% vs. QQQQ up 1.2% vs. DJIA down 0.6% vs. S&P500 Up 4.8% . It sure looks to me like Kirk kicked Brinker's axx in 2005.

When comparing results, you should compare my portfolio to Brinker's QQQQ that has a similar beta.

I recommend my newsletter portfolio for the "aggressive growth" part of a core and explore portfolio. For Brinker's subscribers, I recommend they REPLACE Brinker’s recommended QQQQ weighting in all his portfolios with my newsletter portfolio. So it is 13% vs. 1.2% in 2005. About 10:1 if you ignore the fact that 1 year is far too short a period to make meaningful comparisons. smile

As of 1/4/05, since Oct 15, 2000, when Brinker recommended the NASDAQ100 Exchange Traded Fund (QQQQ) in a mailed special bulletin to his subscribers, my newsletter portfolio is up 54% while his QQQQ recommendation is down 48%!

With low cost commissions, it would cost roughly $192 to duplicate my portfolio plus the cost of my newsletter. I think my performance against QQQQ more than makes up for the added cost. With my newsletter portfolio, you actually save money over the expense ratio of the QQQQ if you have over $100,000 to invest in that part of the market. (QQQQ has an expense ratio of 0.2% that means it costs you $200 for every $100,000.) For his P1 subscribers, Brinker recommends 25% in QQQQ so those with any “significant assets” should see significant cost savings as well as my better performance.

-- posted by Kirk