Bob Brinker
bobbrinker.com
Opening Monologue
If you've been with the program for a while, you'll recall that back in May Bob suggested some of the conditions which would bring about a bear market rally in NASDAQ index. For those of you that consider yourselves sophisticated and experienced in the world of trading, Bob suggested at the time that you consider a trade in the QQQ shares, which track the NASDAQ 100 index.
Those of you that were able to pick up those QQQ's in late May in the mid 70's took profits on that trade on Aug. 3 when the market hit the protective stop at $84 per share that Bob established on last weekend's program. The proceeds from that trade should have been returned to the cash reserve position that has been maintained since mid-January, Bob says. If you are a regular listener, you'll recall that Bob recommended in mid-January that you put most of your money in money market funds.
Obviously, there are problems associated with recommending this kind of a short-term trade during a radio program that airs only on the weekend. The problem is that the radio audience cannot be updated daily on the status of the trading situation, so changes in protective stops cannot be made except for on the weekend. This creates limitations, Bob thinks, in the ability to do this kind of a short-term operation--this kind of operation is much more productive when dealt with on a daily basis. This is further complicated by the kind of volatility we see with the NASDAQ, which Bob refers to as "investing on steroids." Bob will take these factors into consideration when deciding in the future if he will make any kind of similar recommendations again on the program.
Bob congratulates all of the listeners that made some extra money by participating in this successful short term trade and reminds everyone that the proceeds should now be back in money market funds collecting interest.
Jobs Report
The big number that came out this week was from the Labor Department--it was the jobs number that came out on Friday. One of the most significant things in that report was that the private sector added 138,000 new jobs, which is less than the average for the first sixth months of this year (which averaged 182,000 from Jan-June). That would indicate two possibilities: there are fewer jobs available or there are less skilled people available to take jobs that go unfilled. We still don't have an answer as to which one of those is going on yet, but we do know that we have seen an acceleration in the average hourly earnings percentage change over the last couple of months that we certainly will want to keep an eye on. As a matter of fact, the average hourly earnings increase in the July report was at an annual rate of 5.3%, which is far higher than the 3.7% year-over-year figure in that same category.
Now this is something will have to watch very closely along with other signs of inflation that we monitor--we now have the highest CPI since 1991 at 3.7%, we have employment cost index figures of 4.4% year-over-year and we also saw a sharp increase in the implicit price deflator in the GDP report for the last two quarters over the previous two quarters. That number almost tripled from 1.1% up to 2.9%.
So the question remains as to whether the worker pool is there to provide the workers for the jobs or whether we are indeed entering that inevitable period where we will see an economic slowdown--at worst a recession. That would imply a reduction of corporate earnings, which would come against a background of high expectations, Bob says.
One of the amazing things that has been happening is that companies are pre-announcing earnings shortfalls into the next quarter, which is very early in the cycle for that to be happening, Bob says. As time goes by, we'll see just how widespread these earnings disappointment--no doubt about it, though, this is something investors are going to have to look out for.
When you look at the demographics of the employment report, you have white unemployment sitting in at 3.5% and black unemployment at 7.7%. The unemployment rate for males that are 20-years old and older at 3.2%, while the rate for women is 3.7%. Even the teenage unemployment rate is down to 13.4%. These are some of the lowest figures we've had in the last 30 years, Bob says.
Unemployment rate continues to hold in near 4% and everything would suggest that the economy is continuing to grow. We need more data to establish whether we are going into a slowdown or whether we are going to have renewed growth as we have in recent years due to the mild winter. We'll see if that brings any more buoyancy back into the economy in the second half or if the Fed rate hikes are indeed starting to bite.
Will the Fed Hike Rates Aug 22?
Bob thinks the rate hikes should start to have an impact--we've had 6 rate hikes, bringing rates up by 175 basis points. The great debate is what figures will come out--including July retail sales next week--which will influence the Federal Open Market Committee members at their upcoming Aug. 22 meeting. The FOMC has two options--they could stand pat and wait for the other hikes to filter through the economy or, if they want a little extra insurance on getting the economy out of its fast growth rate track, they hike the Fed funds rate again by 25 basis points. That would be the seventh rate hike, bringing rates up by 200 basis points.
Bob puts the odds of a rate hike at less than 50/50 but says it is very hard to call without the July retail sales figures in hand. The one reason they might do it now is because they will not want to do it at the Oct. 3 meeting, which comes just ahead of the general elections. During the Oct. 3 meeting, FOMC members will likely discuss the World Series and will leave rates alone until after the election, Bob says. They've only raised rates once during the last dozen general election cycles--that was during the Vietnam War when things were heating up. So they aren't going to raise rates Oct. 3--Aug. 22 is the whole ballgame and then they are going to climb under a rock and have a ceremonial meeting Oct. 3. When they come back in late November then they will have a free hand to act depending on what the economic data say.
Based on what we are looking at right now, it would appear that we still have some way to go until the Fed goes from its current tightening bias towards an easing policy, Bob says. To go to an easing policy the policy-makers would have to be really scared that they have over-tightened--and it's possible that they have--and that they are going to throw the economy into a spiral. It looks like a growth recession is money in the bank at this stage; you can almost count on slower rates of growth and slower rates of earnings growth. The only question is whether or not the policy makers can keep the economy growing it at some small rate without pushing it into two consecutive quarters of decline, which is of course the classic definition of a recession.
Semi-Conductor Cycle Over?
John from Martinez wants to know if the semi-conductor/capital equipment cycle is over. Bob looks at the stock prices rather than what analysts say about the cycle--Bob likes to watch the price/earnings multiples to make a determination on where to get out. Clearly, the multiples got out of hand on a lot of these stocks--what investors had to do was put a price target on some of these stocks and then take money out when it reached that target.
When you see meltdowns in you stock, it doesn't matter what anyone says about the cycle. Who cares about the cycle when your stock has lost 50% of its value in a matter of weeks or months? When the price/earnings rations get to nosebleed levels, you have to take your money off the table. Bob thinks that time came and went and predicts a lot of people are going to get caught in those stocks.
Microsoft Outlook
Kelly from Birmingham has Microsoft stock and wants to know what the outlook is for the shares in light of the antitrust situation. Bob says it is difficult to predict what the Department of Justice will decide to do, but notes that now the E.U. Commission is now involved. In Microsoft's case, the antitrust concerns have been a company specific factor that has contributed to multiple compression. In general, Bob believes that there will be a continuation in multiple compression, particularly for those high P/E stocks, for some time to come.
More upside on the NASDAQ?
Shirley from Lansing, Mich. moved money in her 401K into the NASDAQ in late May and wants to know if there is more upside to the NASDAQ. Bob is puzzled by Shirley's decision to put money into the NASDAQ rather than trade the QQQ. Bob reiterates that he specifically advised against using individual stocks.
But since Shirley put money in mutual funds in late May, at the bottom of the market, she should now have a profit, Bob says. Bob's position on the NASDAQ is the same--the NASDAQ has potential to trade in the low 4,000 sometime in the month of August. But, Bob warns, that the market is still seeing a very high level of speculation, and many speculators will experience a very painful process as the market purges the speculators. The NASDAQ will return to a bear market, in Bob's opinion, so he advises using periods of strength to take profits.
Why not all cash?
One listener wants to know why, given the concerns about high valuation levels, investors shouldn't move all their funds into cash reserves. Bob says that if your money is in tax-deferred accounts, and if you use periods of strength to make your decisions, you should view the cash reserve parameters as a guideline that takes all investors into consideration. Each investor has to decide how much risk they want to take. Bob reiterates that his advice since the middle of January is that you keep most of your money in stock market cash reserves--each investor has to decide individually how to implement that.
Internet Infrastructure and Cisco
Gary from Lancaster wants to know what Bob thinks of the Internet infrastructure companies, specifically Cisco Systems. Bob says that those companies aren't his cup of tea, especially given his expectations that companies are going to be fighting multiple compression and earnings deceleration against a backdrop of very rich valuation. As for Cisco's earnings, which are due this week, Bob has no specific information but points out that the company has historically tended to report a penny or two above the Wall Street consensus.
Marriage Penalty Tax Lives On
Those of you that are forced to pay higher income tax because of that unfairness known as the "Marriage Penalty Tax" should be prepared to continue to pay that higher income tax. President Clinton has just vetoed the congressional bill to eliminate the marriage penalty tax--the unfair tax has been saved today because of a presidential veto, Bob says.
Model Portfolios
On Monday night, Bob ran the numbers on how his model portfolios have done for the first 7 months of the year--the numbers were measured against the Wilshire 5000 (the total U.S. stock market). In every case, the model portfolios were outperforming the Wilshire 5000 by 400-500 basis points, which translates to 4-5%. So in every case, you were able to make 4-5% more by investing in the model portfolios versus being a buy and hold investor in the Wilshire 5000.
Presidential Campaigns and Tax Proposals
Ray from Chicago wants to know how Bob feels about the difference between the Bush and Gore tax proposals. Bob thinks this is a good question and an important subject. George W. Bush is proposing a very significant decrease in the federal income tax rates, bringing the top rate down significantly from 39.6% down to 33%. He also wants to take the 31% rate down to 25%, the 28% rate down to 15% and the 15% rate down to 10%. Bob thinks such a move would stimulate the economy--something that Bob supposes Alan Greenspan might be concerned about but would not be able to stop. The question Alan Greenspan would ask, and rightly so, is how can you reduce the taxes before you pay down the debt
Al Gore is also proposing a tax cut decrease--not as large as the decrease that George W. has proposed but it is also a tax decrease. Now, his is more geared towards the middle class, but it is still a substantial tax decrease. They are both campaigning on a tax decrease, but George W. is campaigning as the largest tax cut.
Bob notes that there was a report this week that George W. said he would raise taxes to protect the surplus if there was a recession. Bob hopes this report is incorrect--Bush's tax cut plan would help to stimulate the economy, and Bob hopes the reporter simply misreported what Bush said.
The George Bush tax cut proposal calls for a $1.3 trillion over a period of 10 years. Obviously this would put a big hit on the forecast surplus over that same period. Most politicians that run on a tax cut seem to get elected--one exception was Bob Dole, who ran on a tax cut in 1996 and didn't come really close to winning. In reality, this has quite an impact on the projected budget surplus if these proposed tax cuts go through.
The vice-president has targeted tax cuts, which looks like they would amount to about $250 billion over a 10 year period. Bob thinks its fair to say that George W. Bush's tax cut proposal is about 5 times larger than the Al Gore proposal. While Gore's proposal wouldn't ruffle Greenspan's feathers very much, the George W. proposal could have more of an impact.
Ginnie Mae
Mark from Illinois wants to know what Bob thinks about Ginnie Mae--Bob thinks Ginnie Mae is a sweetheart. Ginnie Mae has already put 5.6% on the board this year and is just acting like a very mature adult, Bob says. Ginnie Mae's are beating the Wilshire 5000 year-to-date by over 6%
School District Bonds
Listener Frank's broker recommended going with school district bonds over state obligations because they have a better yield--Frank's broker told him that the safety is the same because the school districts are insured. Bob doesn't know how the broker can say that--if you invest in a state general obligation bond, you have the full faith and taxing power of the state government standing behind your bond. To compare that with insurance on a bond is like comparing apples and oranges, Bob says. In the last century, there has never been a default on state general obligation, which is something that certainly should get your attention.
Tax Cuts vs. Spending
Dennis from Kansas City notes that Greenspan has previously said that he doesn't want to see taxes cut before the debt is paid down, but he would rather see a tax cut than an increase in government spending. Bob predicts whether there is a tax cut or an increase in government spending, spending will increase. If the government spends it then it gets spent, if the government gives it back the consumer then its going to get spent by the consumer. If it is used to pay of the outstanding treasury, that retires debt.
Presidential Elections
Well, there's a general election just around the corner, and barring a big come from behind by Ralph Nader or Pat Buchanan, it looks like it will be either George W. or Al Gore, Bob says. That will establish policy, including economic policy, for the next four years. This creates a bit of a conundrum for Alan Greenspan and his compadres on the Federal Reserve because on the one hand they are trying to manage the economy but on the other hand they are trying to stay out of campaign politics. They have to climb under a rock until after the election--whatever they do on Aug. 22 they will be less visible up until the election. After the election, they will be free again.
Disappointing Politicians
Marvin from Chicago thinks Bob is being very nice to the politicians--they know the right thing to do but are playing the public like a musical instrument. Bob says he is not going to be nice to them anymore--he is totally demoralized at the quality of individual the country is nominating to be president. Perhaps because of the process, perhaps for other reasons, we may now not are now left in situation where we are not going to have extremely high caliber individual running for the position.
More on the Internet
Gary from Palm Springs worries that getting out of the Internet infrastructure company--Cisco, Oracle and the likes--means getting out of the future of the Internet. Bob reiterates that he has recommended people put about 25% of their portfolio in U.S.. stocks, so if someone has stocks they really believe in they can still hold them within those guidelines. Bob does not recommend that people hold more than 4% in any one company, though.
Bear Market
Gary also wants to know when the NASDAQ correction will take place. Bob says it is not anything resembling correction--it is a full-blown bear market in the NASDAQ. Statistically, the NASDAQ is already in a bear market, and Bob believes the earliest that the bear market will be completely over is sometime in the year 2001. If this happens the way Bob expects, when it does bottom out it will be a killer buying opportunity, but investors will have to be patient.
Bush's Social Security Plan
Victor in California wants to know what the impact of George Bush's plan to allow a portion of social security to be invested in the stock market would be. Bob says it is difficult to say--it could take a while for it to come into the market since it could be phased in. The plan would be to take about 2% of the 12.4% take out and allow that to be invested in the market. Bob has no problem with this if it goes into something like the Wilshire 5000--he doesn't think that people should be gambling with individual stocks. It is an experiment, but Bob disagrees with Al Gore's characterization of the plan as a risky scheme.
From aboard the StarShip MoneyTalk. Thank you,Trekkies. Gary Villapiano/David Gibson ABC Radio Networks, NYC
Copyright 2000 ABC Radio Network
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Rich, if NAZ up another 80% this yr last 99, we might run out of doctors :) |
