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Brinker - Moneytalk Summaries - June 5, 2011
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Moneytalk Show Review June 5, 2011 |
 
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June
5, 2011 Newsletter Excerpts - Editorial Comment ("EC"):CLICK HERE to download a FREE issue of "The Retirement Advisor" written by David Korn and Kirk Lindstrom DAVID KORN'S WEEKLY STOCK MARKET COMMENTARY: Stocks posted losses for the fifth consecutive week. For the week, the Dow declined 2.3%, the S&P 500 declined 2.3%, and the Nasdaq declined 2.3%. All the indices performed about the same this week. Year-to-date, the Dow is up 5.0%, the S&P 500 is up 3.4%, and the Nasdaq is up 3.0%. EMPLOYMENT REPORT Brinker Comment: The big economic news this week was the employment report that came out on Friday morning. Private payroll rose in May by 83,000 jobs. However, government payrolls continue to shrink. The number of government jobs lost in May was 29,000. That means the total number of nonfarm payroll jobs net was 52,000. The previous three months averaged gains of 220,000, so this is a significant decline. This month is a light number in a slow-growing economy. Bob said if he had to point to the biggest problem the Obama administration has had now in its third year, it was not prioritizing the economy from the get go. Instead, they tried to do something about everything, such as health care. They took the eye off the ball and now 2-1/2 years and they are still looking at numbers they cannot be happy with. The national unemployment rate is 9.1% - just 1% below the peak! The demographics of unemployment are broken down as follows: white unemployment is 8.0%; black unemployment is 16.2%; Hispanic unemployment is 11.9%; Asian unemployment is 7.0%. The biggest unemployed group is usually teenagers and that is no exception this month, coming in 24.2%. EC: The unemployment rate was 5.0% in December 2007 when the recession commenced. The cycle high for the recession is 10.1% in October 2009, and the cycle low for the expansion that ended in December 2007 occurred in March 2007 when the unemployment rate got as low as 4.4%. It is hard to imagine a 4.4% unemployment rate these days huh? Brinker Comment: When you look at unemployment by education, the numbers underscore the value of education. Those with a bachelor's degree or higher have an unemployment rate of 4.5%; some college have a rate of 8.0%; high school diploma 9.5% which is over the national average; less than high school diploma 14.7% -- the highest of any education category. The best money you will ever spend is on education. Look at the disparity between the 4.5% for those with a college degree and the national average of 9.1%. Education is clearly important to your employment opportunities. Brinker Comment: Average weekly earnings are up 2.4% over the year which is 0.8% below the consumer price headline inflation number of 3.2% for the same time frame. It is close in line using the personal consumption expenditure index inflation number. EC: Read the May employment report at this url: http://www.bls.gov/news.release/empsit.nr0.htm Caller: This caller is concerned about government deficits and posed the question of whether the dollars in his savings account could be worth less because of inflation. Bob said he has been waiting to see when Congress gets serious about balancing spending with revenue which Bob defines as within 3% of GDP whereas right now we are closer to 9-10% which is a national disgrace. There is a lot of rhetoric but no real serious move. Bob warned that if our representatives in government don’t get serious, we run the risk that they will print their way out. This means that they will print money to pay their debt and allow inflation which reduces the real cost of what you have to pay because you are paying back the debt in inflated dollars. The problem is this reduces the value of everyone else’s money. Bob noted that this is what happened in Germany where you needed a barrel of German currency to buy a loaf of bread. EC: There are many countries that have gone through periods of hyperinflation where the nation’s currency is devalued. And it can happen extraordinarily fast — especially during periods of civil unrest. A recent example was in 1992, the first year of post-Soviet economic reform when inflation was 2,520%; 840% in 1993 and 224% in 1994!
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| PRINTING
MONEY Caller: This caller said there is a common misperception about the government “printing money.” In 1913, Congress delegated monetary policy to the Federal Reserve and we switched from United States Notes to Federal Reserve Notes. So now it is not Congress, but the Federal Reserve that determines when to print money and it is an independent decision that does not require a vote by Congress. It is important to understand that Congress gets its money from tax receipts and selling US Treasuries. The closest thing Congress can do to print money is expanding the debt limit so that they can sell more Treasuries. Once they do that, they need buyers of Treasuries and the currency to redeem those Treasuries. We are in a situation now where Japan may redeem Treasuries, or the Social Security Trust Fund might even redeem Treasuries. The real decision of whether we are going to “print” our way out of this will be made by the Federal Reserve. If there is a Quantitative Easing Three (QE3) that is your best indication we are going to be printing our way out of this mess. The caller went on to explain how the Federal Reserve raises money. The Federal Reserve is a government sponsored enterprise and like others they are self-financing. The Federal Reserve has investments, they charge interest, they make money. Bob cut the caller off and said the Federal Reserve does make a profit but that profit is turned over to the United States Treasury at the end of every year. EC: I wish Bob had let the caller talk a little more because I think more people need to understand the role of the Federal Reserve in our system. Truth is Federal Reserve Notes are fiat currency meaning that it has value only because of a government regulation or law. The term “fiat” derives from the Latin term meaning “let it be done” as such money is established by government decree. Federal Reserve Notes replaced United States Notes which were once issued by the Treasury Department. That said, even though Federal Reserve Notes are not issued by the Treasury Department, they carry the (engraved) signature of the Treasurer of the United States and the United States Secretary of the Treasury. Today, th notes are backed only by the “full faith and credit of the U.S. government”, whereas in the past some notes were backed by silver and before 1933 by gold; that is, the law provided that holders of Federal Reserve notes could exchange them for a fixed amount of metal. With our deficits growing higher and higher, I think it I important to understand this reality. GOLD Caller: This caller is worried about hyperinflation and is considering switching some of his Portfolio III which is held in a 403(b) plan into gold. He contacted a company on TV to get some literature and since then has been bombarded with telephone calls, some with high pressure sales tactics trying to persuade him to invest half of his portfolio in gold. Bob said there are a lot of gold sharks on the prowl right now, and if you want to implement a hedge in gold for your portfolio, use the GLD exchange traded fund for the investment. That will get you into gold without mark-ups. If you purchase gold coins, you can be paying up to 100% in mark-ups. The profits are huge for the gold numismatic coin sellers. It is an unregulated market and that is one of the reasons there is so many sharks in this area. EC: The SPDR Gold Trust (GLD) is the biggest player in this area. Other ETFs to look at if you are interested in gold include the iShares Gold Trust (IAU), Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ). Caller: The caller cautioned people to be careful when buying gold or silver because the government could step in to regulate the commodity as they have done in the past for gold. It could dramatically change the value of the products. The caller noted that you saw silver collapse 30% after margin increases in silver futures were implemented last month. EC: In the first week of May, silver suffered its worst five trading days with silver-futures prices down about 30% following a series of CME margin increases in silver futures. top of page
MONEY
FUNDS
Caller: This caller read an article in Friday’s Wall Street Journal where a Columbian professor warned investors about the safety of money funds. Should he be worried about the money funds with the big fund families such as Fidelity, Vanguard, etc. Bob said you should be worried about all your investments, at least insofar as always being on your guard and knowing fully about the risks associated with the investments. Money funds hold securities of short-term basis and can hold short-term paper, Treasuries, large bank deposits, etc. Bob said you should know how every fund invests your money. Bob recalled the Reserve Money fund that had to wait for money and accept a mark-down on their net asset value. Bob said he blamed that fund manager for sticking with Lehman after Bear Sterans EC: In the past, Bob has said he feels Vanguard and Fidelity money market funds are safe and believes they will be not break the buck and make good on the $1 per share. The article that the caller refers to makes the point that if a single large fund suffers a credit loss all funds could be at risk because investors could all try to redeem at once to get $1 per share and if a fund had to redeem shares during a time of financial stress, their fund could be required to sell their holdings at such low prices that they break the buck. Read the article the caller referred to entitled, “Why Investors Should Worry About Money Funds” at this url: http://tinyurl.com/6xgmc3j INTERNET/STOCK TAXES Caller: Other than capital gains taxes associated with selling a security, are their taxes associated with stock transactions? Bob said basically there isn’t. The caller asked whether implementing a very tiny tax on each transaction was a possibility to raise revenue for the government. Bob said that would not be welcome on Wall Street, but he wouldn’t rule out anything at this point given the mind-boggling deficits we have. EC: There was discussion in 2009 on the Hill about imposing a securities transaction of 0.25% on every stock trade. With the elections last November, don’t expect to see that passed at this juncture. But down the road, who knows. Caller: This caller asked whether the government was collecting taxes from transactions over the Internet or whether companies were getting a free ride there. Bob said for the most part the Internet has been getting a free ride. Bob said you couldn’t rule out that tax, just like you can’t rule out a tax on stock transactions. EC: Just this past week, the California lower house of the Legislature passed a bill aimed at closing a legal loophole that allows Amazon.com and other Internet retailers to avoid collecting California sales taxes on purchases made via computer. Learn more about it here: http://tinyurl.com/43zp3xp OIL MANIPULATION Caller: This caller read an article saying that Clive Capital Hedge Fund lost $400 million in a week trading oil futures. Astenback Capital also reportedly loss millions. The caller said there was also a report of another hedge fund cornering oil futures at one point. Bob said he is opposed to any manipulation in the commodity market. However, Bob said he wants to see consistency. People should complaint equally on price increases as they do on price decreases. Nobody seems to complain that their is manipulation when the price goes down. Bob said it has been amazing watching oil prices come down from their recent high of $115 a barrel to $100, but the price at the pump for gasoline moved so little. EC: Read about the enormous amounts lost by these hedge funds in oil futures at the following url: http://tinyurl.com/5rgpujk COMMODITY FUTURES MODERNIZATION ACT OF 2000 Brinker Comment: Bob said this week he was looking at the Commodity Futures Modernization Act of 2000 (CFMA) and believes you can blame part of the financial meltdown in 2008-2009 on that Act which was a bi-partisan effort to regulate derivatives including credit default swaps. This legislation prohibited state regulation of derivatives and credit default swaps. It is hard to believe they put that provision in there because they had to make this act immune from state gambling laws. Bob said this law effectively created legalized gambling on Wall Street in these derivatives and credit default swaps. This was casino capitalism. There was no meaningful reserves set aside for the credit default contracts. When the credit markets collapsed in mid-September of 2008, the inevitable happened. Since there was no money set aside, the government had to step in and provide the money, otherwise the counterparty risks spread across the system would have been brought down. Taxpayers have have already been on the hook for over $100 billion as the government determined that AIG was too big to fail. This was casino capitalism. Bob thinks this legislation was a big culprit in the fact that we have lost 8 million jobs. Who was responsible for this legislation? It was backed by Wall Street, but it was approved by in large part a bipartisan effort. |
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EC: The Commodity Futures Modernization Act of 2000 meant that most over the counter derivative transactions would not be regulated as futures under the Commodity Exchange Act or as securities under the federal securities laws. Instead, the dealers of these products would have their derivatives supervised by their federal regulators under general “safety and soundness” standards. Bob is exactly right that the CFMA continued an existing 1992 preemption of state laws that prevented any such law from treating eligible OTC derivatives transactions as gambling or otherwise illegal. It also extended that preemption to security-based derivatives that had previously been excluded. Learn more about the law at this url: http://tinyurl.com/6hx5jjc |
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GREECE DEBT Caller: This caller read an article discussing Greece’s debt and how many countries have credit default swaps tied into Greece and that is why they are trying to bail them out. The caller asked if there were systemic problems in Europe that could impact the U.S. stock market. Bob said he didn’t know about that, but there were definitely problems in Greece, Portugal, Ireland and maybe Spain and Italy. There has been no final resolutions to the problems in Euroland. But the problems they have are much more related to those countries than ours. EC: The sovereign debt problems abroad have not changed Bob’s bullish outlook on the US stock market. But I guarantee if there was a financial meltdown in Europe along the lines of what we had in 2008-2009, our stock market would not be immune. But for now at least, it appears to be contained to the countries that Bob mentioned. Check out the article entitled, “Greek Debt Default Chatter Continues to Fester” at this url: http://tinyurl.com/3dglfgq BANK STOCKS Caller: This caller wants to know why the government is not investigating the banks for what they did in connection with mortgages that led to the financial crises. Bob said he thinks they are doing that and noted that the financial stocks have been under pressure lately. Bob said the stories about banks not having the proper mortgage paperwork, having “robot-signers” and the like have legs. EC: There certainly has been pressure in the financial stocks. Goldman Sachs has been subpoenaed in an investigation by the Manhattan district attorney. Moody’s warned it might downgrade the debt of Bank of America, Citigroup and Wells Fargo as the government eases back on support for the sector. New regulations that restrict debit card fees are scheduled to go into effect on July 21st, although there is a movement on Capital Hill to delay that start by 15 months. RATES Caller: What do you think of the Fed raising the prime rate? Bob said banks raise and lower the prime rates. Watch the economy. The prime rate is closely tied to the economy, as well as the fed funds rate and doesn’t seem to be going anywhere. We are seeing slow growth in the GDP numbers and the jobs picture. As long as we have low inflation and a slow growth economy, there is no basis for the fed to raise the fed funds rates or for banks to announce that they are going to raise the prime rate. EC: Keep track of the Prime Rate at this url: http://tinyurl.com/ya7dy6v |
| MONEYTALK GUEST Bob had
on Newsweek reporter, Michael Hirsh, author of the book, “Capital
Offense: How Washington’s Wise Men Turned America’s Future Over to Wall
Street.”
David Korn didn't think the interview wasn’t worth summarizing.
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