I think you will find comments made by Bob Brinker about the market from one year ago very interesting. Make sure you check out Bob's comments on the Nasdaq toward the middle of my Interpretation. This Interpretation was done on March 11, 2000.
David K's Interpretation of Moneytalk, Educational Links and Other Financial Information for Saturday, March 11, 2000
Preliminary Disclaimer: 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, helpful financial links, guest contributors and even humorous remarks. I also provide special alerts from time to time. If you want to know what was actually said verbatim on Moneytalk, listen to the show live. You can even listen to a re-broadcast of past Moneytalk shows on the Internet via the archives. The web site www.bobbrinker.com has all the links to the ABC Radio Network Stations that broadcast the show live and via the Internet. There are even free summaries of the Moneytalk shows on that web site. There is an additional disclaimer at the end of this e-mail.
Market Numbers and Key Economic Data as of the Close of the Market on Friday, March 10, 2000
Dow: 9928.82
Nasdaq: 5048.62
S&P500: 1395.07
30-Yr Bond: 6.189%
Opening Monologue: Bob began the show by referencing the upcoming meeting on March 21st by the Federal Reserve Open Market Committee which will be watched by all investors carefully. The committee will make the determination of whether to raise short term interest rates by considering a variety of factors including: the inflationary outlook; how the leading inflation indicators are performing; economic growth; and, the stock market. If Greenspan only looks at the overall market, he might feel pretty good that the S&P500 Index is down about 5% year to date and the Wilshire 5000 is only up about 1.5%. On the other hand, if he looks at the Nasdaq he might wet his pants. The Nasdaq is up over 24% which appears to be reflect investors' insatiable appetite for immediate returns on their money. Bob pointed out that while the Wilshire 5000 reflects the entire market, the S&P500 Index reflects about 75% of the market, whereas the Nasdaq only represents telecom stocks, computer related stocks and biotechnology stocks.
Bob acknowledged the incredible volatility in the market, particularly in the biotechnology sector. Bob pointed out that investing in biotech stocks is really pure speculation that a company will develop a future drug to make the company profitable. Why? Biotech stocks aren't really part of the "new economy" like internet companies; thus, their recent dramatic price increases can only be attributed to hope and speculation that they will come up with a blockbuster drug to drive profits down the road.
The volatility in the Nasdaq continues to break records (in part as a result of biotech stocks and other internet high flyers). There have already been 12 days in which the Nasdaq has moved more than 3% in a single day! The good news is on six of those days, the Nasdaq went up 3%. I'll leave it to you to figure out what happened on the other six days. Between 1988-1995, there were only seven days when the Nasdaq moved 3%. That's once a year versus the average of once a week this year.
EC: Here is a link to a chart of the Nasdaq going back to its formation in 1971 published by the Wallstreet Journal which was reprinted on Suite101.com. Looking at the chart will make you dizzy -- Ms. Lizzy.
suite101.com.
Caller #1 David: Do you think Proctor & Gamble (NYSE: PG) is a buy in view of its recent price decline? (PG's share price plummeted this week after announcing lower than expected earnings. PG opened the week trading at $88 per share and closed Friday at $53 per share.) Bob noted that even after the initial decline, buyers stepped in and drove the stock back over $60. However, toward the end of the week there was no support and the stock fell sharply to close at $53. Even though PG is a blue chip company, Bob would not be investing in it at this time, especially in view of the market conditions. Bob suspects that there may be more earnings bombshells coming from the old blue chip companies.
Brinker Comment: David also asked some basic questions about buyers v. sellers of stocks. Bob pointed out that when you see trades go through in million share blocks, that is probably an institution (such as a mutual fund) buying or selling. Bob also noted that there are buyers and sellers for every single trade and when there are an equal number of buyers and sellers, the stock's price will stabilize.
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TACTICAL ASSET ALLOCATION WATCH
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EC: Here is how the major market indexes have played out as of the time Bob's timing model went negative based on the closing high of the S&P500 Index recorded on December 31, 1999:
Performance Of Market Indexes Since December 31, 1999
S&P500 Index: Down 5.05%
Dow Jones Industrial Average: Down 13.64%
Wilshire 5000: up 1.51%
Nasdaq Composite: Up 24.07%
Russell 2000: Up 19.63%.
Caller #2 Katherine: She recently received a job offer from a b2b company. She will be receiving about 20% less if she takes the job, but she will get about 7000 stock options and the company is trading around $300 per share. Bob did a little bragging and pointed out that he has been more bullish on b2b than anyone he knows, and that he has even recommended a b2b mutual fund which is up over 40% since he recommended it. Bob's advice was to basically go for the job because the reduction in salary wasn't that big a deal. (and the stock options could pay off handsomely!)
EC: I am going to guess that the company Katherine received the offer from is Ariba (ARBA) which is trading at $305 per share. Probably would be a good place to work if you could get stock options. Sound interesting? David K is here to help you not only with your finances, but also to find rewarding employment as well! Check out this link to read about Ariba's career opportunities:
ariba.com.
Caller #3 Danny: If you have maxed out all of your tax deferred investments, would you consider an annuity? Well, if you are going to invest for a long long time, Bob would consider a variable annuity, no load with no surrender charges.
Caller #4 John: Can you use margin in an IRA account? Never. Margin lending is prohibited in IRAs and 401Ks.
Brinker Tangent: Next Saturday morning Brinker will be hosting the charity event in San Francisco. On April 15th, Brinker will be in Los Angeles. Tickets are still available. Here is a link for more details. (If any subscribers go, please let me know, I have a few questions for him!)
bobbrinker.com
Caller #5 Fred: Fred owns several thousand shares of Exxon. What is your prognosis for this stock? Bob didn't comment directly on Exxon, but he did address the integrated oil stock sector (including stocks like Exxon, Chevron, Royal Dutch, Texaco, etc.) and pointed out that the big oil companies tend to historically trade at a 15% discount to the S&P500 Index multiple and that is where they are trading at right now. The earnings growth rate for the sector this year is around 17% and Bob thinks that they are pretty fairly priced right now on a historical basis.
Caller #6 Richard: This caller has positions in several mutual funds in the Janus Fund family (Olympus, Growth, Enterprise Fund). He is considering adding money to them and wants Bob's outlook for the fund family overall. Bob pointed out that the key to these funds continuing their stellar performance is whether they can retain the fund managers. How do you keep track of that type of information? Basically read all of the information that gets sent to you from the fund family as well as news reports about the fund. Incidentally, Bob referenced the fact that he still owns a portion of the Janus Olympus Fund in his model 1 portfolio.
EC: I imagine that some of you own Janus Funds, and maybe even the Janus Olympus Fund which returned just over 100% for 1999! I found an interesting article on TheStreet.com which pointed out that Janus achieved stellar results in may of its funds last year by making broad bets on a relatively narrow band of large-cap growth and technology stocks. For example, many of their Funds owned the same stocks such as Cisco, Nokia, Sun Microsystems, Comcast, Time Warner, to name a few. The article pointed out that these funds can be huge winners or huge losers depending on the performance of these select stocks. If you are a Janus Fund owner, you might want to read that article at the following link:
thestreet.com.
Caller #7 Tom: His employer's retirement plan now offers him the option to invest in funds with up to 100 fund families. The catch is they impose a 1.5% annual fee based on his total holdings. Tom has about $25,000 invested and wants to know if he should take advantage of this option so that he can purchase selected funds that he likes that aren't currently offered by his plan. Does this sound like a good idea to you? Bob pointed out that 1.5% of $25,000 is $375. Thus, if Tom thinks $375 is worth it to him, than he should do it. Bob did caution that he is not convinced that people can trade in and out of mutual funds and beat the market on a sustainable basis. Tom also asked Bob his opinion on the Washington Mutual Investors Fund out of the American Funds Group (Ticker: AWSHX). Bob compared it to the S&P500 Index and it has done terribly. Enough said.
Brinker Comment: Alan Greenspan spoke this week criticizing the bankers over their lending practices. Greenspan pointed out that bankers need to exercise discretion in making loans to individuals based on the "wealth effect" created by the stock market. If the wealth effect isn't sustainable, will these people be able to pay back their loans? Brinker took issue with this remark on the grounds that Greenspan has refused to raise margin lending. Sounds hypocritical to Bob.
EC: Good point Bob. Here is a link that provides the full text of Greenspan's speech referenced by Bob which Greenspan gave to the Independent Community Bankers of America entitled Challenges Facing Community Banks:
biz.yahoo.com
Brinker Comment: On Sunday's show, Bob said he had a source in Washington who told him that Congress would soon start hearings on whether margin requirements should be raised. Bob thinks this may put pressure on Greenspan to raise margin requirements or to raise interest rates .5% at the next meeting. Bob pointed out that if Greenspan does anything except raise interest rates .25% at the meeting, it will send a loud message to Wall Street.
Caller #8 Dan: Dan realizes that you should attempt to invest in mutual funds with low expense ratios. If a fund has a high expense ratio, but also has a high annual rate of return, could that justify investing in the fund? Depends how high the rate of return is. In general, Bob would not recommend a mutual fund with an expense rate above 2%. Dan also asked if their is a way to invest in Internet stocks similar to Diamonds for the Dow, or Spiders for the S&P500 Index? Bob mentioned Merrill Lynch's Internet Holders (HHH) although he doesn't recommend them specifically.
Caller #9 Mary: Mary wants to start planning for her eleven year old child's college education. Bob basically told her that she should start educating herself on the Internet and that Vanguard has some good information on the issue. Bob also pointed out that if her child goes to an in-state University, that will save a ton of money comparing to sending the child to a private university.
EC: Vanguard has a good article entitled Plain Talk: Financing College - Planning For Your Child's Education. Here is a link to that article:
vanguard.com.
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Caller of the Day
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Caller #10 Al: Bob, you have been quoting Alan Greenspan as saying that he didn't think that stock market appreciation should exceed the rate of household income. You have also pointed out that if you take the rate of household income of 6.5% (and throw in another 1% to represent dividends if you were invested in the market), that would bring you to about 7.5%. Two questions. (1) Could Greenspan really limit the stock market growth this year to 7.5%? (2) If so, why would anyone want to be in the market if they knew that they were going to earn at best 7.5% return? Bob thought this question went to the very heart of what he has been preaching. With respect to the first question, Bob believes Greenspan can keep the market down by virtue of his control of short term interest rates. In fact, Bob pointed out that if you annualize the Wilshire 5000's rate of return this year so far, it comes close to 7.5%. With respect to the second question, Bob doesn't think it would make sense for people to be in the market under that scenario given that you can invest in safe fixed income investments that are currently yielding about 7%. Al then asked Bob if people were taking this seriously and Bob quickly pointed out that the market was most definitely reacting -- just look at the S&P500 Index which is down 5% for the year and the Wilshire 5000 which is only up 1.5%. Well what about the Nasdaq, Al asked. Bob noted that the Nasdaq stocks are included in the Wilshire 5000. Bob thought that Greenspan is basically reacting to the overall market, not the Nasdaq which could account for the divergence. In fact, if Greenspan starts to focus on the Nasdaq and becomes worried about the wealth effect created by the Nasdaq, Bob would expect him to raise interest rates .5% on March 21st. If he raises only .25%, than he is probably just reacting to the overall market. Al then asked what if the market goes down 20% this year? Greenspan would be very happy because the wealth effect problems would be partially solved. If that happened, could the market than return to earning more than 7.5% per year? Yes, if the economy slowed sufficiently.
EC: BB, using the alias, WABC New York, posted the following message on bobbrinker.com in response to a question someone posted asking why Brinker couldn't predict the Nasdaq. I think you will find it of interest:
[Brinker] said biotech, computer related and telecom stocks have stoked the Nasdaq. He said nasdaq has no detailed data available prior to mid 1980's, no long term historic data. He said he has no way to make specific nasdaq predictions because his model follows the S&P500 Index and reflects the broad market, not only biotech, computer or telecom stocks. He made no prediction on nasdaq. Never has made any nasdaq forecasts in his newsletter either. Last week he called shorting nasdaq playing Russian roulette. Sounds about right.
Message #98817 on the General Investment Discussion thread on bobbrinker.com. Link follows:
bobbrinker.com.
Brinker Comment: What will Greenspan be considering at the next Federal Open Market Committee meeting in making the decision whether to raise interest rates? He will be looking at roaring economy, a stock market that hasn't done much this year unless you are in biotech stocks, computer related stocks and telecom stocks. Greenspan's goal is to slow the growth rate of the economy which is tough when he has to combat the wealth effect created by the stock market. Also, he faces the "election year effect" where federal, state and local spending are all up. Greenspan would rather see a paydown on the roughly 6 trillion dollar national debt instead of additional government spending. Bob pointed out that the last two long business expansions in the United States were followed by recessions. Greenspan is attempting to avoid that by constructing a "soft landing" to the economy.
Caller #11 Mark: Do you think productivity will increase the wealth effect, or do you think it will help combat inflation? Bob believes it helps combat inflation and mentioned how his model has incorporated the higher productivity growth in this country. Greenspan is saying that investors are paying the highest valuations for tech stocks because it is believed that the productivity gains achieved by the tech companies are worth the price. The Nasdaq 100 is trading almost at a 200 times p/e multiple based on year 2000 earnings estimates.
Mark Continued: What about international markets? Bob pointed out that the international component of his timing model is doing better than the broad market. The valuation situation is more extended in the U.S. than overseas. Why not put more in foreign stocks in worldwide funds right now? Mainly because a lot of that money is invested in Japan, and Bob doesn't really want to load up in Japan.
Caller #12 Mike: Does the Nasdaq 100 track the Nasdaq or is it simply the largest 100 stocks in the Nasdaq? In general, it is the 100 most important stocks on the Nasdaq which usually correlates to the largest Nasdaq companies. If a stock is going to move out of the Nasdaq 100 Index, would that affect the stock dramatically? Probably not as bad as if a company left the S&P500 Index.
EC: I went to the Nasdaq.com web site to check on the Nasdaq 100 Index (traded as QQQ). The Nasdaq 100 Index reflects Nasdaq's largest companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. Eligibility criteria for the Nasdaq 100 Index includes a minimum average daily trading volume of 100,000 shares and must have been listed on an exchange for a minimum of two years, with certain exceptions. Here is a link to a list of all of the companies included in the Nasdaq 100 Index:
dynamic.nasdaq-amex.com.
Brinker Comment: According to Bob's latest calculations, the average p/e multiple of the twenty largest companies in the Nasdaq 100 Index that have earnings is 195 times earnings! Contrast that to the S&P500 Index multiple which is trading at 25 p/e multiple, even though the S&P500 Index includes those Nasdaq stocks! (That means the multiple on the Nasdaq 100 is about 6 times the multiple of the S&P500 Index.) If the S&P500 Index growth rate is 8%, that means investors are paying for an annual growth rate in the Nasdaq 100 of 48%!
EC: Interesting analysis. Doesn't help my QQQ put options though!
Caller #13 Bob: This caller noted that Procter and Gamble has a p/e multiple of 20. Bob pointed out that the 20 number is based on trailing earnings and that the S&P500 Index has a 27 p/e based on trailing earnings. Thus, the stock is trading at a 23% discount compared to the S&P500 Index. BB noted that all price/earnings multiples have risen in recent years. The average p/e multiple during this century is in the high teens. However, the household products group (which includes Procter and Gamble) have been hammered in the last year. Just look at companies like Colgate-Palmolive Company, Kimberly-Clark and other similar companies which are far below their 52 week highs. The household products group historically trades at up to a 25% premium to the S&P500 Index which shows you that nobody wants these stocks!
Brinker Comment: According to Bob, the correct definition of the price of a stock is "the discounted present value of all future cash flows." Investors selling stocks like Procter and Gamble believe future cash flows for the company will be lower than previously expected
Caller #14 Ben: If the Nasdaq were to take a tumble, would it affect the business to business e-commerce fund (TEFQX)? Absolutely.
Caller #15 David: With the recent shifting of funds from stocks to cash, this caller asked Vanguard what protection he has for his money market funds. Vanguard said they protect up to $100,000. Bob said he wouldn't be concerned about it with Vanguard.
EC: Although Bob didn't mention it, I thought you would find valuable an update on one of Bob's favorite sentiment indicators -- the bullish sentiment as reported by Investor's Intelligence. Bob looks at the percentage of bulls divided by bulls + bears to come up with his number and than looks at the 4 week rolling average. When the number gets above 70%, it doesn't look pretty for the market. As of this week, the rolling 4 week average is 65.46%. Not terrible, but certainly a lot of bullish sentiment in the air. I owe these figures to Gene who posted them, along with a fine article on Suite101.com at the following link:
suite101.com.
Caller #16 Jeff: Value stocks? No one wants to own value stocks. Should he continue to buy them? Bob didn't know but provided a good example of how unwanted value stocks are at this time. Bob referenced Lafarge Corp. (NYSE: LAF), one of the biggest cement and construction material companies in the world. Its 52-week trading range is about $19-$37 and it closed Friday at about $19 3/8. The company has a 3% dividend and trades at only 5 times earnings and their earnings are growing!!!
EC: Bob said he wasn't recommending people buy Lafarge, just pointing out how investors are shunning value stocks. That said, I may have to take a closer look at Lafarge. Here is a link to Lafarge's investor relations web page:
lafargecorp.com
That's the show! To find out about my service, you can e-mail me at this address:
davidk555@earthlink.net
Disclaimer: I am just a listener to Moneytalk and provide this service on my own volition. 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 simply my own interpretation and commentary of some of what is discussed on the show, along with educational information I provide that I think is useful to help better understand financial issues. There are also editorial comments, useful links and contributing editors and even special alerts. I am also a frustrated writer and comic and try to weave humor throughout. You should not rely on any statement made in David K's Interpretation of Moneytalk, Educational Links and Other Financial Information or Special Alerts as constituting financial advice. Also, under no circumstances does the information in any of my e-mails represent a recommendation to buy or sell stocks.
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