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November 20, 2011

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David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2011

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November 20, 2011 Newsletter Excerpts  -  Editorial Comment ("EC"):



Brinker Comment: There are dimming prospects for the Super Committee to come forward with a deal on what cuts should be made to the budget.  They are supposed to come up with $1.2 trillion in deficit reductions and they aren’t getting anywhere.  There is a giant divide between the two parties on how to narrow the enormous gap between revenues and outgoes at the federal level.  They have a November 23rd deadline, but really they need to get it done tomorrow if they want it to have a chance to get it approved.  Bob said unless they come up with a last minute deal, we will have to rename them the Loser Committee.

EC:  Bob must have been brutal in Junior High.

Brinker Comment:  Bob noted that the latest polls show that only 9% of people approve of the way Congress is conducting business whereas 84% disapprove of the performance of Congress.  The Super Committee is only going to add to that disapproval rating.  On one side, the Democrats want to increase the tax rates on the high income earners. On the other side, politicians don’t want to increase taxes at all and there is now a push to make the George W. Bush tax cuts permanent.  There is also heavy disagreement on cuts to entitlement programs.

The good news is that even if the Loser Committee fails, budget cuts will automatically go into place.  The cuts would start in January 2013 and run for 10 years through 2022.  On Meet the Press, a member of the Committee said his party would look for a way to ease the cuts if they can’t reach an agreement.  “There is a way to avoid the cuts if there is good will on both sides, ” said Senator John Kyl who describes the Pentagon cuts as draconian.  Bob noted that if people are looking for the Congressional Budget Office (CBO) to save the day, the are running out of time to score any last minute plan.  Thus, it looks like the Super “Loser” Committee won’t be able to get the job done.

Brinker: Bob said if the Super Committee fails to come up with the plan, we will have “sequestration” which is the automatic trigger of $1.2 trillion in cuts and will result in $120 billion in cuts each year for a period of 10 years. These numbers are small in compared to the overall debt. The triggers would become official on December 23rd.


Brinker Comment: The eurozone is undergoing a very difficult time, but a historical analysis of the euro — the official currency of the eurozone — is worth noting.  The euro was put in place to improve trade and began trading at $1.17 for the first time in 1999.  Then it fell out of bed and went to the mid 80s.  At one point, you could get a euro for 85 cents.  The euro then went up as high as $1.50, and now it is trading around $1.36.  That means the euro is still about 15% higher than in 1999 when it started trading as a currency.

Kirk Here:  See ==> CURRENT Survey of Best Savings Account Rates <==
EC:  The euro is now the second largest reserve currency and the second most traded currency in the world after the good old Greenback.  What many people don’t realize, is that this summer the euro surpassed the dollar in terms of having the highest combined value of banknotes and coins in circulation in the world.

Kirk Here: 
See PE Valuation Ratios For Japan, USA, Europe and Asia

Brinker Comment: With the sovereign debt crises, the European Central Bank (ECB) becomes the most important player in Europe in terms of fixing the issue.  The ECB is patterned somewhat after the Federal Reserve, only the ECB has a single mandate which is to keep inflation under 2%.  They do not have a full employment mandate as part of their policy like the Federal Reserve.  

EC:  The ECB administers the monetary policy of the 17 Eurozone member states.  It also has the exclusive right to authorize the issuance of euro banknotes.

Brinker Comment:  The European Central Bank is influenced heavily by Germany which is the fifth largest economy in the world.  One of the provisions of the 17 euro-member nations allows each nation to issue its own sovereign debt. They also allow the 17 nations to manage their own budgets.  The countries who went in the direction of fiscal irresponsibility were allowed to go down that road and that is where the heartaches begin.  Greece has managed its budget in such a horrible way that their debt requires a 25% annual interest rate for their 10-year note.  No country can survive when the interest on its debt burden is that high.  That is why we have seen a series
of bail out efforts. 


Caller: This caller purchased some I-Bonds about 10 years ago on Bob’s recommendation that had a base rate of around 3%. Bob said that was a fantastic rate and he robbed Uncle Sam blind.

Bob said
he would hang on to them because of that base rate.

Kirk Here:  See   iBond Base Rate History

This caller purchased I-Bonds from 2000-2006, then he stopped buying them when the base rates got close to zero, but this year he is buying them for himself, his kids, etc. What do you think of that?

Bob said once the base rate goes down to zero, the attractiveness of this security is minimized. The caller said his Certificates of Deposit were maturing and he figured it was worth the 3-month penalty to purchase the I-Bonds

Kirk Here:  See  Current I-Bond Rates

BUYING GOLD           

Kirk Here:  See  Gold Price Quote and Chart  and Gold / GLD Price Support Charts

Caller: What is your feeling on buying gold coins.

Bob said if you are going to invest in gold, that is one way to do it.  Bob said you could purchase the American Eagle for the gold weighted content.  Those coins will be priced close to the gold content with a little premium. Bob also mentioned the Krugerrand, the Australian Crown.  The other way was to purchase the exchange traded fund (GLD) which is an inexpensive fund backed by gold bouillon and is a terrific way to invest in gold.  Bob said that would be his first choice.

EC: If I was buying gold to own it at home for an Armageddon type scenario, I would buy the American Eagle.  They are the only bullion coin whose weight, content and purity are guaranteed by the US government.  So you know you are getting 22 karat gold.  Learn more about it from the US Mint at this url: http://tinyurl.com/89moumd

Kirk Here:  Be careful how you calculate the premium!   The American Gold Eagle is ONLY 91.67% gold!
22 karat gold is not pure gold. ONLY  24 Karat gold is pure (99.9%) gold.  From Wikipedia:

Karat purity is measured as 24 times the purity by mass:

X =


X is the karat rating of the material,
Mg is the mass of pure gold or platinum in the material, and
Mm is the total mass of the material.
Thus, 22 Karat gold is 22 parts pure gold and 2 parts anything else for a purity of 91.67% gold.

Caller: This caller asked how the GLD exchange traded fund has performed compared to gold bullion since gold made its move some years ago.

Bob said the GLD fund has performed the same as bullion because it is backed by gold bullion.  

Kirk Here:  I agree with Brinker.  See
Caller:  Do you think the Eurozone will break up and if so what will that do to the price of gold? 

Bob said his guess is the European union will come through, although Greece may have to go back to its own currency.  In terms of gold, Bob said its price does benefit from the failure of fiat currencies. But one country like Greece, which is relatively small, probably wouldn’t have a big impact on gold.  It would impact the banks that have Greek debt on their books and those banks may even have to raise capital.  

Caller:  Is the dollar in danger of failing, and if so should you invest in gold? 

Bob said he does not think the dollar is in danger right now.  That said, Bob acknowledged that the failure of paper currency is a positive for the price of gold since many investors use gold as a hedge against the devaluation of currencies these days.

Caller: Is there an advantage to being in a fixed income vs. a balanced portfolio?

Bob said a balanced portfolio might have 50% in the stock market and 50% in fixed income where your objective would be different than an income only portfolio.  In the balanced portfolio you are looking for some growth, protection against inflation and some income.  An income portfolio is less concerned with an inflation hedge in terms of capital appreciation and way more concerned with getting current income to pay their bills and support their lifestyle.   The caller said if someone was in their 80s, what would you recommend?  Bob said he could see someone in their 80s leading heavily toward an income portfolio and minimizing their stock market exposure.

Kirk Here:  Model Portfolio #1 in "The Retirement Advisor" is a balanced portfolio while Model Portfolio #3 is 100% out of stocks.  Model Portfolio #2 has about 30% in equities which would be about right for someone 80 yrs old with a life expectancy well into the 90s.

More about the American Gold Eagle
From Wikipedia, the free encyclopedia 

The American Gold Eagle is an official gold bullion coin of the United States. Authorized under the Gold Bullion Coin Act of 1985, it was first released by the United States Mint in 1986.

Offered in 1/10 oz, 1/4 oz, 1/2 oz, and 1 oz denominations, these coins are guaranteed by the U.S. government to contain the stated amount of actual gold weight in troy ounces. By law, the gold must come from sources in America, alloyed with silver and copper to produce a more wear-resistant coin. The specific alloy is also referred to as crown gold. The actual gold fraction is .9167 or (22 karat). It is authorized by the United States Congress and is backed by the United States Mint for weight and content.

                      Gold Eagle

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Kirk Here: For charts and quotes, see Vanguard Fixed Income Funds:   GNMA (VFIIX),                        
Total Bond (VBMFX),  TIPS (VIPSX) High-Yield/Junk Bond (VWEAX)

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