Anyone still interested in the stock market? Moneytalk with Bob Brinker? This is an Excerpt of my e-mail provided to my subscribers on October 27-28, 2001.
David K's Stock Market Commentary, Interpretation of Moneytalk, Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service.
October 27-28, 2001 Edition
Please Read the Disclaimer at the end of this Post
David K's Stock Market Commentary: An excellent week for Wall Street as the bullish trend which commenced on September 24th continued despite bursts of intra-day efforts by the bears to hold the market back. For the week, the Dow Jones Industrial Average rose 3.7%, the S&P500 Index rose 2.8% and the Nasdaq Composite jumped 6.2%.
The amazing thing about the market in the last few weeks, has been to watch the market go lower during the day, only to see a reversal by the close with the indices ending in positive territory -- basically, the opposite of what we typically witnessed during the later summer months. An extreme example of this bullish market behavior was exhibited on Thursday during which the market saw a 285 point swing in the Dow in which it closed up 117 points for the day. The other indices had similar reversals with the Nasdaq gaining 2.54% after falling 2% earlier in the day.
Now, before you get all excited, "bear" in mind that the market has had a phenomenal run in a short period of time. Indeed, there have only been 25 trading days since the lows of September 21st. If this rally, whether short term or longer term is to continue, one could expect backing and filling along the way.
Since the inflection point on September 21st - which constituted a three year low in the market, the Dow has gained 16%, the S&P500 has gained 14%, and, the Nasdaq has gained 24.0%. Leading technology shares higher have been the semiconductor stocks with the Philadelphia Semiconductor Index (SOX) up 28% from the September 21st lows. Can you guess what other technology security of interest is about the only thing that comes close to that type of performance? Yup, the QQQs! They are up 27.7% on a closing basis since September 21, 2001.
Investor sentiment remains fairly bearish which is encouraging from a contrarian standpoint. According to Barron's, Investor's Intelligence this week shows the bulls constitute 43.3% and the bears constitute 32%. Using the formula, [(bulls)/(bulls + bears)], the percentage comes to 57.5%, with the four week average at 52.35% - about the same as where sentiment stood on September 17th.
The widely followed University of Michigan Consumer Sentiment Index came out on Friday registering 82.7 for October. It was lower than the preliminary reading, but still higher than September's reading. Keep in mind that it came out before the most recent information on the anthrax scares which cause a lower reading next month. The sentiment index remains as low as it was when the economy was emerging from the recession of the early 1990s, but far higher than it was during the last recession. For instance, during the second half of 1990, the index fell to almost 60.
Valuation concerns in the market still weigh against the possibility that a new bull market is off and running again. According to DowJones news service, as of Friday, the S&P500 had a price/earnings ratio of about 30. Contrast this to a year ago when it was at 26.47.
nasdaq.com\www\Nasdaq\news\35\2001\10\26\200110261700DOWJONESDJONLINE000632.html
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Link of the week!
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The whole issue of valuing the market, and figuring out what the proper price-to-earnings ratio is, has been the subject of thousands of publications. If you are at all interested in this issue, then I strongly encourage you to read an article entitled, "The Bubble Has Not Popped." This article was written last week and takes the position that analysts who say the stock market is "undervalued" are wrong. The author explores the different ways to calculate the p/e ratio and compares the methodologies to historical forecasts of p/e ratios afforded the S&P500. It is well-written and easy to understand and was the clear winner for the coveted link of the week slot:
aqrcapital.com
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Moneytalk Caller of the Day!
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Caller: In the early spring of 2000, this caller took Bob's advice to go mostly cash, and he told a lot of his friends to do that as well. Unfortunately, many of his friends were in denial at that time. The caller then said he heard John Bogle speak recently who said that if you think the economy in five years is going to be further ahead than it is now, and earnings will be higher than they are today, than you should be invested in the stock market. Bob said Mr. Bogle's position has always been that you don't do any timing in the market, that you buy and hold. As far as Bob knows, Mr. Bogle has not deviated from that position. Bob added that he has high regard for Mr. Bogle's books, and has a great deal of admiration for Mr. Bogle making no-load, low cost mutual fund investing available to the average individual.
EC: I would concur with Bob's "Interpretation" of John Bogle's core belief. Indeed, in Mr. Bogle's classic investment book, Common Sense on Mutual Funds, Mr. Bogle makes the following comment on market timing:
"The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know of anybody who knows anybody who has done it successfully and consistently. Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike."
Caller of the Day continued: The caller then pointed out that the "buy & hold" philosophy is not the strategy one should adopt during a secular bear market. Bob noted that this was not John Bogle's view, but was in fact what he (Bob Brinker) thought. Bob pointed out that over the years, there have been secular bull markets and secular bear markets. From February, 1966 to mid-August, 1982, there was an easily identifiable secular bear market. Indeed, the Dow was lower at the end of that time frame than it was in the beginning. The S&P500 had gone nowhere, all you had was your dividend income. From August, 1982 through the first quarter of last year, there was a secular bull trend where you couldn't go wrong with the buy & hold philosophy. Bob added that the buy & hold mentality usually reaches its peak level at the end of a secular bull market. The opposite is also true. At the end of a secular bear market, nobody wants to invest in stocks. The caller then asked the million dollar question: how difficult is it to correctly time the cyclical bulls within a secular bear market? Bob said it is very difficult. Indeed, it is the most difficult undertaking that Bob is aware of, although he has made the decision to undertake that task. Bob added that the only way he is aware of to make meaningful money during a secular bear market, is to take advantage of timing the cyclical bull market trends within that secular bear market. Bob noted that most likely we entered a secular bear market in the first quarter of last year and investors should seriously consider that possibility. The caller concluded saying that he hopes Bob is able to predict those cyclical bulls.
EC: Amen.
EC#2: Bob pointed out that the Dow Jones Industrial Average actually lost principle (going from 995 to 776) during the 16 year secular bear market between 1966-1982. Rande Spiegelman, who advocates against market timing, provided the historical rates of returns for the S&P500 index and small caps for 15 and 20 year periods of time from the mid-1960s, to the early 1980s, which include dividends. The results are surprising, and although there is no guarantee that history will repeat itself, the results are worth noting:
For example, according to Rande, if you look at 15-year compound annual returns, between 1966-1980, the S&P500 earned 6.71% and Small Caps earned 14.09%. Between 1967-1981, the S&P500 earned 7.11% and Small Caps earned 15.64%. And between 1968-1982, the S&P500 earned 6.96% annually and Small Caps earned 12.89% annually. If you extend the time frame to 20-years and do compounded annual returns, between 1966-1985, the S&P500 earned 8.66%.
suite101.com
EC: Bob isn't the only person who is talking "secular" bear markets. Thanks to Andrew for alerting me to an interesting article from Salomon Smith Barney that suggests that the 1982-2000 secular bull market is complete and a secular bear market is upon us. The article is entitled, "The Bear at Work?" and you can find it by going to this link, and scrolling down to the 4th article. You will need to register at the site to access the article:
salomonsmithbarney.com
Caller: This caller wants to know what type of visibility there is for corporate earnings. Bob said that corporate CEOs are not giving us much guidance right now due to lack of visibility. Bob added that the earnings outlook for 2002 has been continuing on a deteriorating track. Bob expects downward guidance on aggregate earnings to continue.
EC: Bob sounded pretty gloomy in response to this question. I think Bob's fear of lower corporate earnings is a key to why he hasn't recommended getting fully invested again. If earnings projections continue to be cut down, than the price-to-earnings multiple will not see improvement.
Caller: This caller said he read the book, Random Wall Down Wall Street, by Burton Malkiel. In the book, the author points out that the market is efficient making it futile to exploit stock market situations. Therefore, analyzing trends, economic conditions, etc. is pointless and if there was a model that exploited predictability, other people would exploit that model and take the predictability out of the market. I think the caller was gearing up for another million dollar question and was going to ask Bob how the author would react to Bob's long term timing model. Before the caller could ask that question; however, Bob deflected it asking the caller if all the talking heads on T.V. were correct back in the spring of 2000 when they were saying the market could only go up. As the Moneytalk bumper music began to play, the caller had no chance. As soon as he agreed the talking heads were wrong in spring 2000, Bob said he agreed with the caller and said he was sure that Burton Malkiel would as well.
EC: (sigh). I wish Bob had chosen to tackle this question head on. It was a good question, and one raised obliquely by the other caller this weekend who asked about the buy & hold philosophy of John Bogle versus the timing philosophy espoused by Mr. Brinker. I imagine if I could cross-examine Bob about his response to the last caller, he would say that Burton Malkiel's theory still makes sense in that most people who think their models work, (i.e. talking heads from 2000) simply don't have models that work. On the other hand, Bob's model, which I would assume he believes works, isn't followed widely enough to impact the market. At least that is what I think Bob would say.
Brinker Comment: Bob pointed out that the next meeting of the Federal Open Market Committee meeting is scheduled for November 6, 2001, at which time the FOMC will meet to determine the future of interest rates. According to the Chicago board of trade federal funds futures contracts there is a 100% chance of a 25 basis point cut, and a 35% chance of a 50 basis point cut. If the FOMC cuts the fed funds rates by 25 basis points as expected, that will bring short term interest rates down from 2.50% to 2.25%.
EC: This link gives you daily prices of the 30-Day Fed Funds:
barchart.com
Caller: This caller remembered reading a study on bobbrinker.com by Neuberger & Berman which covered the 37-year period from 1960 through 1996. The study showed that an investor with 50% of assets invested in the S&P500 and 50% invested in 5-year Treasury Notes were able to earn a rate of return equal to 84% of the total return generated by the S&P500 Index for the same period of time. Bob said the important thing the study illustrated was that don't need a 100% stock market portfolio to get a good rate of return. You could adopt a balanced approach, with 50% in stocks and 50% in treasuries, and still do extremely well. The caller wanted to know where he could find the study, but Bob didn't know.
EC: I always felt that Bob's "tactical asset allocation" was inspired in part by Neuberger & Berman study referenced above. After all, Bob originally recommended maintaining 40% in equities (later reduced to 35%). When the market started going up after Bob made that recommendation, Bob was quick to point out that his tactical asset allocation would capture most of the gains in the market, while at a fraction of the risk. A good study to remember.
EC: If you want to read the Neuberger & Berman study referred to by the caller, you can find it in the December 8, 1997, issue of Bob Brinker's Marketimer. How did I know that? Because I just spent 20 minutes going through all of my old Marketimers. Am I dedicated or what -- Or just nuts! By the way, this link brings you to the Neuberger & Berman website where you can search their "knowledge center" for past articles:
nb.com
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I-BOND ALERT!
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Brinker Comment: Bob reminded callers that there is little time left to purchase the I-Bonds for the month of October. If you purchase the I-Bond on Monday, you will be get the 5.92% interest rate being offered for October. In addition, did you know that even if you purchase them by the last day of October, you will still earn interest for the entire month of October -- that's like getting a 1/2 percent interest bonus!!! YEE HAH!!! WHO WOULD HAVE THOUGHT I-BONDS WOULD HAVE BEEN SO EXCITING!
EC: Whew, things are getting pretty wild on Moneytalk.
Brinker Comment: Bob noted that some Federal Reserve Banks do sell I-Bonds, so if you find one in your area that does sell them, it is best to go there and buy from them directly. Also, Bob gave out two toll-free phone numbers to people at the Federal Reserve that can answer questions about I-Bonds:
1-800-245-2804
or
1-800-245-2805
EC: Bob made another good point later in the show about purchasing I-Bonds. He noted that since you need to hold them 5 years to avoid the 3-month interest penalty, it makes sense to purchase a few in $1,000 denominations. That way, if you need a little extra money, you can redeem the $1,000 bond versus being required to redeem a $5,000 or $10,000 bond.
Caller: This caller was going to purchase some I-Bonds with his credit card. Bob said to make sure that you have a few days of grace period so you don't get hit with penalties or fees from your credit card company. The caller also said he was worried the Treasury would not be able to sell the bonds quickly enough so that you purchased them with an October date. Bob noted that is a big deal to get the October issue. Bob suggests that you go into a bank to make sure you get the October date.
EC: One of my subscribers said they got a lot of frequent flyer miles by purchasing the I-Bonds on their credit card. However, at this late stage, I would agree with Bob and suggest you go to purchase them at the bank on Monday to ensure the October issue date. Here is some more info on I-Bonds on Suite101 which is where I think Bob got some of his information on I-Bonds for this weekend's show:
suite101.com
Caller: This caller from Los Angeles went to the Bank of America on Friday to buy I-bonds, but the person she spoke with told her she couldn't guarantee that she would get the October issue date. Instead, she suggested she try the Federal Reserve Bank. So, this Trekkie trekked over to the Federal Reserve Bank on Grant Street to buy them, but they don't sell bonds there. Bob chimed in noting that not all Federal Reserve Banks sell bonds. The caller then went to Wells Fargo where the person she dealt with told her she could only sell her $3,000 in bonds. The caller is frustrated. Bob noted that there might be a "run on I-Bonds" because they are so attractive now. She wanted to know if Bob could recommend any banks which could sell them. Bob noted that the Federal Reserve Bank in Pittsburgh sells them, but that wouldn't really help the caller. Bob suggested she try other banks in her area, and if not go online, although he couldn't guarantee October settlement which is what you wanted.
EC: Forget the gold rush - we have a run on I-Bonds!!!
EC: I just went to check the website where you can purchase I-Bonds online. Once you start the process, in big boldface letters, the site says, "BONDS PURCHASED TODAY MAY HAVE A NOVEMBER, 2001 ISSUE DATE." The problem is the issue date is when the Fed gets the money from your credit card company, not the date you make the transaction online. In addition, if you try to purchase them online, you can only purchase them in $1,000 increments and it can take a long time if you are trying to purchase a lot. If you still want to try, here is the link to where you can purchase I-Bonds online:
wwws3.publicdebt.treas.gov
Caller: A caller was looking at municipal bonds in Oregon, but was lamenting the state income tax in Oregon. Bob suggested I-Bonds, noting that the caller and his wife can both invest $30,000 per year in I-Bonds, and since it is on a calendar basis, they could invest another $30,000 each in I-Bonds in January, 2002. That would be $120,000 they could get into I-Bonds over the next three months. Bob said that you will need to hold the I-Bonds for 5 years to avoid the 3-month interest penalty. Bob also noted that I-Bonds are for fixed income if you don't need the current income to pay your bills.
EC: The Government came up with a new publication called the "Savings Bonds Owner's Manuel." If you are an owner of I-Bonds, Series EE Savings Bonds and Series HH Savings Bonds, its a great educational resource. Best of all, its online at this link:
savingsbond.gov
Caller: This 40-year old caller has 4 kids and is maxing out his retirement fund. He has $60,000 to invest. Bob suggested that he use the money for his children's education. Bob suggested that he compare the 529 Plans, the Educational IRA as well as I-Bonds as the vehicle for investing for his child's education.
EC: Using I-Bonds as a way for saving for your children's education is an interesting idea, given the attractive rates presently offered by I-Bonds. There are some prerequisites, however, to doing that. First, you must be at least 24 years old on the date you buy the bond. The bonds should still be registered in your name (or your spouse's name), although your child can be listed as the beneficiary. You can use the proceeds for post-secondary institutions, such as colleges and universities, and vocational schools that meet the standards for federal assistance. Qualified expenses include tuition and fees (books and room and board are not qualified expenses). You must use both the principal and interest from the bonds to pay qualified expenses in order to exclude the interest from your gross income. If you are single and earn over $70,750 or married and earn over $113,650 you can't get the tax exclusion this year. For more about using savings bonds for education, go to this link:
savingsbond.gov
Caller: This 51-year old caller wants to know at what point in life he should stop contributing to the Roth IRA and his 401(k). Bob said if you have the cash flow from earnings, you should continue contributing in both. As a follow up question, the caller noted that with the limits on the Roth IRA going up to $3,000 next year, he may have to lower the amount of his 401(k) contribution to come up with the extra $1,000. Bob pointed out that the Roth IRA is not as attractive since the 401(k) plan is pre-tax money. Max out on the 401(k), and if you can max out on the Roth IRA do that as well.
EC: Here is a website I stumbled on this week. The 401Cafe. It is a neat website which has a good FAQ on 401(k) plans. Here is the link:
401kafe.com
EC: For Roth IRA Frequently Asked Questions, go to this link:
invest-faq.com
Brinker Comment: Bob reminded listeners that starting next year, you can invest more money in tax deferred accounts. Up until this year, investor contributions, including employee contributions and any matching contributions were capped at $30,000, or 25% of compensation whichever was less. Under the new law, the contribution can be the lesser of $40,000, or 100% of compensation. The IRA contribution limits have also been increased. Next year the contribution limit will be $3,000. You will be able to invest $500 in "catch up" contributions if you qualify. The "catch-up" provision applies to individuals who are over 50 years old next year. They will be able to contribute an additional $500 next year (as well as in 2003, 2004 and 2005 and $1,000 in 2006).
EC: There are so many resources and articles written describing the new tax law. Here is one that I printed out because it is well-written and provides the beef of what is important, including the catch up provisions:
businessweek.com
EC: For those of you subscribers who are reaching the nifty 50 years and need some catching up, make sure you check out the Vanguard website for an article entitled, "Lifetime Events: Catching Up on Retirement Savings" which you can read at the following link:
personal.vanguard.com
Brinker Comment: Bob noted that the new tax law has some nice features relative to tax deferred savings' plans designed to save for higher education. Contributions to the educational IRA will increase next year from $500 to $2,000. Also, starting next year, proceeds from the educational IRA can be used for elementary and secondary school in addition to college.
EC: The Motley Fool website has a good article on the Educational IRA which you can read at this link:
fool.com
Brinker Comment: The new tax law also improves the benefits to 529 Plans (named after Section 529 of the Infernal Revenue Code). Qualified withdrawals from 529 plans are free from federal tax starting next year. Forty-three states now offer 529 plans. Bob noted that California and New York offer attractive 529 plans. Everything you ever wanted to know about 529 plans is at this link:
savingforcollege.com
Caller: This caller has a bunch of cash and wanted to know if Bob is recommending investing in mutual funds, or whether he is still recommending cash. Bob was crystal clear in his answer. At this juncture, his long term model portfolios have a 65% cash reserve and 35% equity allocation.
EC: No MOABO yet. Bob's long term model portfolios remain mostly cash with 65% invested in a money market account. The 35% equities is spread over 25% in the United States markets, 5% in Europe and 5% in International markets. Note that Bob doesn't include the QQQ recommendation as part of his long term model portfolio, although since it has turned into a long term hold, perhaps he should reconsider.
Caller: What's your opinion on the bonds issued by GMAC last week? Bob said he had no problem with the credit quality of GMAC, but wanted to know the rate being offered. Bob said they are taxable bonds (unless held in a tax-deferred account). Bob said if the rate is good, he would have no problem owning them for fixed income money, but he didn't think it would be able to beat GNMAs by a significant amount, or be better than the I-Bonds because of their tax-deferred benefit.
EC: GMAC is the finance arm of General Motors Corp. Last week, GMAC sold $6 billion of global bonds. GMAC sold $4 billion of 8 percent 30-year bonds, its first ever with that maturity. GMAC also added $2 billion of 6.875 percent notes to an issue maturing in September, 2011, yielding 7.364%. If these yields interest you, contact your broker. Bear Stearns & Co, J.P Morgan, Morgan Stanley and UBS Warburg were the joint lead managers for the deal. Here is a story on the bond offering:
biz.yahoo.com
Brinker Comment: Bob discussed the incredible $200 billion fighter jet contract which was awarded to lucky Lockheed Martin Corp. (Ticker: LMT). Lockheed will be required to build more than 3,000 planes over the next 20 years, with additional overseas sales and maintenance contracts possibly doubling the revenue under the contract. Lockheed beat out Boeing for the deal. Lockheed's stock had been rising in anticipation of the possibility that Lockheed could get the contract. Those speculators have been rewarded as Lockheed shares have risen considerably. Lockheed traded as low as $30 in the last 52-weeks but reached a new closing high of $49.92 on Friday. Lockheed shares also pay a small dividend of 44 cents per share, or less than one percent.
EC: The contract awarded to Lockheed (known as the Pentagon's Joint Strike Fighter contract) is simply staggering in its scope. However, before you go run out and purchase Lockheed's stock tomorrow at its all-time high, make sure you know what you are getting into. Its going to take some time for the government to pay out on the contracts. Indeed, the contract will run over the next quarter century, which is 25 congressional budget cycles -- lots of room for change. Still, it will be interesting to follow Lockheed's stock over the next decade to see how this all plays out. Here is an article to wet your whistle:
dailynews.yahoo.com
EC: During the September 15-16th weekend broadcast, Bob addressed how the defense industry might be impacted by the terrorist attacks noting that there would be additional spending for America's defense; however, Bob didn't seem overly enthusiastic for defense stocks noting that the money might not go toward traditional defense spending such as building missiles. I mentioned three stocks including Raytheon (NYSE: RTN), Lockheed Martin Corp. (LMT) and Northrop Grumman (NYSE: NOC) which could trade higher when the market reopened. It is interesting to see how well they have performed since then. They have all taken different routes, but as of Friday, their percentage gains have all diverged. Check out this chart which I created that compares how the three stocks have performed since the September 11th attacks. It's a long link, but worth a look:
moneycentral.msn.com
Brinker Comment: Bob noted that the Wilshire 5000 reached its peak on March 24, 2000, and since then has declined almost 30%. The S&P500 reached its peak at the same time at 1527, and now trades around 1104. The Dow Jones Industrial Average has held up better on a relative basis. Why? Because the Dow is made up of only 30 stocks. The S&P500 is a better reflection of the overall market, representing about 75% of stocks. The Wilshire 5000 represents the entire United States market.
EC: This is a brutal bear market we have been enduring. Many people are beginning to compare it to the bear market of 1973-1974. Check out this article entitled, "1974 vs. 2001 Bear Markets - What's The Difference?" It is written by Paul Kasriel and you can read it at this link:
investavenue.com
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Nasdaq/QQQ
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EC: For those of you who have converted your QQQ shares to a longer-term holding, whether on purpose or not, there is an article in this weekend's Barron's magazine entitled, "New Shape to QQQ-bism" and is written by Erin Arvedlund. The article points out that the Nasdaq 100 index (which the QQQ shares are based on) will be rebalanced in December and may have a significant impact on the markets. There is speculation that the Nasdaq 100 Index will diversify away from technology and be less volatile, which has important implications for options investors. Nasdaq will announce the changes on December 17th and those changes are effective after trading on the third Friday in December, or the December 21st market close. Read more and post your thoughts on the Nasdaq 100/QQQ shares at this link:
suite101.com
If you would like a copy of this entire e-mail, simply send me an e-mail at:
davidk555@earthlink.net
Disclaimer: This e-mail is not a substitute for listening to Moneytalk. It is only my interpretation and commentary on some of what is discussed on Moneytalk, along with stock market commentary, additional educational information that I include, editorial comments, helpful financial links, guest contributors and even humorous remarks. I also provide Special Alert e-mails to my subscribers during the week which is an important component of my service. 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 also free summaries of the Moneytalk shows on that web site. There is an additional disclaimer at the end of this e-mail. 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 financial links and contributing editors and 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 Stock Market Commentary, Interpretation of Moneytalk, Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service as constituting financial advice or as a recommendation to buy, sell or hold stocks. Finally, this e-mail is strictly information and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright David Korn, L.L.C. 2001 |
