Home: ForBestAdvice - PeopleBob Brinker - Moneytalk Summaries - April 24, 2011
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April 24, 2011
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April 24, 2011 Newsletter Excerpts  -  Editorial Comment ("EC"):


Brinker Comment: The stock market has shown a tremendous come-back over the last 25 months. It is rather remarkable when you consider everything that has happened. The all-time closing high in the S&P 500 of 1565 occurred back in 2007. At today¹s closing price of 1337, the S&P 500 Index is 14.5% below its all-time high. However, you have earned 3.5% years of dividends during that time which tacks on another 7% to our return. Therefore, on a total return basis, the S&P 500 is only 7% down from its all-time high. And right now, the markets are doing very well. The Dow just recorded a new high for 2011 and the S&P 500 is just a hair away from its 2011 high.

EC: The cyclical bull market marches on. I have been giving a lot of thought to where the bull market might end and how to identify it. One component to look at of course is price level. Obviously, price level is only a number, and earnings, interest rates, and a whole other things factor in. But this is a game of numbers so I look at everything I can.

It¹s interesting to note that the secular bull market peak in the S&P 500 was 1527.46 which was recorded on March 24, 2000. From there, we went on that brutal two-year bear market losing about 50% of the stock market value until October 9, 2002 when the S&P 500 closed at 776.76. Then we had the run to October 2007, where once again the S&P 500 was in the 1500s, closing at its peak of 1565. And then along came the financial crises. Another horrible bear market ‹ one of the worse ever, bringing the S&P 500 down to 676.53 on March 9. 2009.

I¹m not projecting or forecasting 1500s for the S&P 500 right now. I think it is more prudent to either be bullish or bearish than to pick a specific price target way down the road as that sort of thing tends to lock you into a viewpoint. But the 1500 level is worth noting, at least from a historical basis in recent years. If the secular bear market is still in tact (which I believe it is), then the market will have a challenge breaking out of the vicinity of the 1565 high without another bear hitting the scene.


Caller: This caller read an article suggesting that the S&P 500 price-earnings ratio was getting higher than historic levels and that the stock market was entering bubble territory. He asked Bob if now was a good time to sell his stock holdings. Bob was pretty emphatic in his response and said he takes a completely different view of earnings. Bob said that based on the work he does, using 2011 operating earnings estimates that he has a high level of confidence in at this point, he thinks the S&P 500 is trading below its historic average multiple. Bob said he is using estimates for 2011 and he is very comfortable using those estimates.

EC: Well there you go. The valuation component of Bob¹s timing model has always been the most important and on today¹s broadcast, Bob was clear that he believes the valuation of the market is compelling and, at least based on next year¹s projected operating earnings, is below the historic averages.

EC#2: Not everyone thinks like daBrink. Here is a link to an article that takes the caller¹s position and gives a different view than Bob¹s on how the market¹s valuation stacks up to history. Entitled, ³History Bodes Ill for stock market: Commentary: Market¹s valuation currently well above average.² I think it is definitely worth reading and you can find it at this url:  http://tinyurl.com/3vyfy7g


Brinker Comment: Bob pointed out that just a few hours after last week¹s Moneytalk broadcast, the S&P Rating Agency downgraded the credit rating of the USA saying that there was a 1 in 3 likelihood that could lower their long-term rating within two ears. They have reduced their outlook on US debt from stable to negative. Bob pointed out that this was no surprise to anyone who listens to Moneytalk. The deficit will grow $1.6 trillion through the end of Sept. 30th. S&P is reacting to this as they should after the mess they made of the sub-prime debacle where they (and other credit agencies) had given AAA ratings to sub-prime junk.

EC: Part of what S&P said was ³Because the U.S. has, relative to its ³AAA² peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable. We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ³AAA² sovereigns.² Brinker Comment: The federal government is going to have to make changes to its spending program. The S&P reduction in its debt rating was another wake up call. There needs to be reform to our biggest spending programs, including Social Security and Medicare.

Caller: This caller wanted to know what Bob would do to reform Medicare and Social Security. Bob said he would gradually push the retirement age out which would save a lot of money. Bob said he wouldn¹t change the benefits for those already in retirement or for those who are near to it. Bob mentioned an article in the NY Times by David Leonhardt that made the claim that someone in their late 50¹s would collect triple what they paid in.

EC: The article that Bob was referring to is entitled, ³A Medicare Plan that Exempts Too Many². You can find it at the following url: http://tinyurl.com/3bfduqw


Brinker Comment: The bond market is starting to act a little better. Investors are contemplating whether there will be some austerity measures in the U.S. Any austerity measures coming out of Washington would slow down economic growth. There would be less money in circulation in terms of fiscal stimulus. There is no question that this would have a restraining effect on the U.S. economy. Investors are starting to look at that and they know that if the Federal Government starts to pull back, that¹s a good thing. There is a lot of pressure on the government right now, and the S&P downgrade only adds to the growing view that something needs to be done about the out-of-control spending.

Restraints in spending will reduce the growth rate of the economy and also it has the effect of reducing inflationary pressures. This is what bond investors are looking at and they like what they see in terms of the risk of an inflating economy decreasing with an austerity plan.


Caller: What factor will the QE2 have on interest rates? Bob said he thinks QE2 will not be extended and will expire in June. However, it is not the only factor that impacts interest rates. The rate of growth in the United States can impact interest rates. The amount of federal spending can impact interest rates. The rate of inflation, especially core inflation, can impact rates. It is not just quantitative easing. The best estimates that Bob has seen would place the impact of quantitative easing is 50-100 bases points. Does that mean when QE2 ends, the long-term bond rate will immediately up 50-100 basis points? Not necessarily, but possibly.

Here is an article entitled, "What Happens After QE2 Ends": http://tinyurl.com/4pp7384

==> CURRENT Survey of Best Savings Account Rates <==


Caller: If the US government defaults on its debt, where would be a safe place to invest? Bob said we aren¹t in that situation right now and we aren¹t even close to that situation. In the long term, it is something investors will be thinking about because up until now, the US. has been the ultimate safe haven and the dollar has been the global reserve currency.

EC: A logical place might be other countries as if the U.S. defaults on its bonds, all of a sudden the greenback won¹t look so appetizing and investing in the U.S. won¹t be the bees knees. Gold, of course, has always been a safe haven when paper currency doesn¹t hold value. OIL

Caller: This caller is concerned about higher oil prices and asked Bob if it might help if the United States nationalized the oil industry. Bob said it would make no difference because we are a ³beggar² nation when it comes to oil and still use over 10 million barrels of oil a day.

Brinker Comment: Bob said he read some nonsense coming out of the Oval Office this week that suggested that the price of oil should be blamed on oil traders. Bob said that is just political crap. The price of oil is a function of supply, demand and exogenous factors.

EC: Back in 2008 when oil prices were skyrocketing, there was a lot of talk that the price of oil was being moved by speculators. There was even a caller to the program who was an oil trader in New York at the commodities exchange who said that electronic trading seems to have caused the prices to move faster. That said, the Commodity Futures Trading Commission (CFTC) did an investigation and said that it had not found any evidence that speculators were artificially inflating prices. Now whether that is the fox guarding the hen house, I don¹t know.

Caller: What are the exogenous factors that can impact the price of oil? Bob said certainly unrest in the oil rich producing nations in the Middle East can impact the price. There is also the fact that we are losing over a million and a half barrels from Libya which remains at war. We have what is tantamount to wholesale slaughter in Syria that has gone on in the past 48 hours. These are real things that are impacting supply and demand. The traders in the oil pits do not control the events in these countries so to put the blame on the price of oil on traders is propaganda. Don¹t fall for it. It¹s pre-election year smoke and mirrors. It is political trickery to cover up the fact that these same politicians have been unable to present you with what you deserve which is a viable energy policy.

EC: We all saw that the price of oil cratered following the financial meltdown. I remember when it was $24 a barrel one day. My gut tells me that fundamentals drive the price of oil in a meaningful way, whether it be up or down, but short-term swings of modest amounts in prices can be swayed by speculators. Not much difference than an individual stock. There is an old saying that I think applies to most securities -- ³value will out² meaning that ultimately, the true value of something will be realized in the market place.


Caller: Do you think the government subsidies for wind and solar are a viable solution to energy problems? Not if you look at the statistics. Even if you add wind and solar power together, they only account for a combined total of about 1.4% of the total of power generated in the United States. What about the other 98.6%? And wind and solar are subsidized. Solar is highly questionable as to whether it¹s even global footprint-wise a good policy. Bob added that he wasn¹t even going to address the absurd support for ethanol policies in Washington.

EC: There is a book by Travis Bradford called, "The Solar Revolution" which suggests that the cost of solar power will go down 40% in the next 3-4 years and be the cheapest way to power your home and business. It is a nice concept, but so far we haven¹t been able to make solar power feasible on a large scale. Here is a link to the web site, Prometheus Institute which features the book the Solar Revolution:  http://tinyurl.com/37834p

Caller: This caller is going to be retiring in a couple of years. He was in Bob¹s Model Portfolio I and also subscribed to Bob¹s Fixed income Advisor. Bob suggested that he look at the Marketimer Balanced Portfolio (Portfolio III). The caller then asked about the funds in the Fixed Income Advisor. Bob seemed a little caught of guard by the question and sort of fumbled around a bit before saying that is an income investment letter and so that letter focuses for the most part on income. Bob said he thinks his Model Portfolio III is worth taking a look at in terms of developing a balance between the equity side and the fixed income side.

EC: For the Brinker historian such as myself, a moment like that provides some entertainment because the "Fixed Income Advisor" is a newsletter that Bob Brinker publishes. Only it is not Bob Brinker Sr., but Bob Brinker Junior who publishes it, along with his sister as last I recall. And Bob has a fixed income only portfolio in his newsletter so that extent father and son are competing, at least insofar as the fixed income recommendations are concerned. I happened to be very biased on this issue and like The Retirement Advisor if you are looking for a conservative investment portfolio, whether it be all fixed income holdings, or a balanced approach. Of course, that is a shameless plug for myself since I publish that other newsletter, but hey, I don¹t plug myself too much I don¹t think. Drop me a line if you are interested and I¹ll send you a complimentary copy just for putting up with my self-promotion.

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Caller: If you wanted to stay in the stock market, but thought a bear market was coming, what stocks could you stay in that do ok in a bear market. Bob said there are sectors that have historically been viewed as defensive. Bob said the food sector has been one of those areas that has held up during difficult times. Utilities have also provided defensive posture, but that can be compromised during a rising interest rate environment.

Brinker Comment: Bob said he thinks it is premature to be talking about a defensive position in the market. There is no doubt that there will be rocky times ahead for investors and eventually a bear market. However, Bob said he thinks it is premature to set up a portfolio now.

EC: If you really think a bear market is coming, there are not tens of dozens of bear market mutual funds and ETFs that provide you the ability to make substantial gains during a bear market. Of course, you have to be right on the market for that. I will provide an update of these kinds of the funds sometime in the future.


Bob had on William Cohan to discuss his book, "
Money and Power: How Goldman Sachs Came to Rule the World." The interview isn¹t worth summarizing.

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