I saw some posts about Bob Brinker here and thought I would share with you my Interpretation of one the Moneytalk shows in which he hosts. If you like it, you can send me an e-mail at the end. Enjoy!
David K's Interpretation of Moneytalk, Financial Education, Helpful Links, Guest Editorials and Special Alerts. May 12-13, 2001 Edition
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, May 11, 2001
Dow: 10821.31
Nasdaq: 2107.43
S&P500: 1245.67
10-Yr Bond: 5.484%
QQQ: $45.55
SYMC: $65.78
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QUOTE OF THE DAY
"People who say they sleep like babies usually don't have them."
- Leo J. Burke
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Opening Monologue: Bob began the weekend reporting on Friday's release of The Labor Department's Producer Price Index ("PPI"), which measures the prices of goods at the wholesale level. The PPI rose 0.3 percent in April - a little lower than the consensus estimate; the "core" PPI, which excludes food and energy, rose 0.2 percent. Bob believes that this report supports his outlook that inflation going forward is not a problem facing our economy. As additional support, Bob looks at the PPI over an extended time frame. On a year-over-year basis, the PPI is up 3.6%, but if you exclude food and energy, the core rate of inflation is only up 1.6%. Bottom line: Inflation is not causing Bob any consternation.
EC: Bob pretty much discusses the PPI like clockwork on Moneytalk and I am certain that it is included as a component of his timing model. Ever wonder what the PPI really is? Well, the Producer Price Index is actually not just one index, but rather a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. This contrasts with other measures, such as the Consumer Price Index which measures price change from the purchaser's perspective. There are a ton of Producer Price Indexes - in fact over 10,000. They are available for products of pretty much every industry in the mining and manufacturing sectors of the U.S. economy. Bob, and other economists, use the PPI as an economic indicator since PPIs capture price movements prior to the retail level. According to the Labor Department, the PPI may foreshadow subsequent price changes for businesses and consumers. That's why the President, Congress, the Federal Reserve and daBrink himself, consider the PPI in formulating their monetary policy outlook.
Monologue Continued: Bob doesn't think the PPI report is going to give the Federal Reserve any concern at their next Federal Open Market Committee scheduled for Tuesday.
EC: Bob wasn't alone in this line of thinking. Ron Schreibman, the Vice President of the National Association of Wholesaler-Distributors, reacted to Friday's PPI by stating the following:
"Higher producer prices, driven by energy and food increases, aren't elevated enough to derail what should be another Fed interest rate easing next week. The question is whether that easing will come in at a conservative 25 basis points or an aggressive 50 points.
biz.yahoo.com.
Monologue Continued: Although the core PPI rate was benign, energy prices have been skyrocketing. If you have been shaking your head as you fill up your car at the self-serv gasoline pump, you probably already knew gas prices have increased dramatically. Are you sitting down? Gasoline prices increased 7.0 percent in April! Ouch.
EC: You can read the Producer Price News Release text at this link:
stats.bls.gov.
Monologue Continued: Bob returned to a theme he began last month -- the profits recession underway in corporate America. With our country's real gross domestic product growth rate at only 1.7% for the 9 months period ending in March, companies are having problem increasing their "top line" or their revenues. Compounding the problem is the fact that companies are having difficulty passing along the increased energy prices that they face to consumers who are also beginning to have a tough time of things. The result? A "profit margin squeeze" resulting in a profits recession which will result in lower earnings for the S&P500 on a year-over-year basis for the first three quarters of this year at a minimum.
With respect to the next meeting of the Federal Reserve FOMC scheduled for Tuesday, Bob remains certain that the Fed will cut interest rates, but like Ron Schreibman, he doesn't know how much. Bob pointed out that a good source to look at to gauge what the Fed will do is by analyzing the fed funds futures at the Chicago Board of Trade. After the closing bell on Friday, the 30-day federal funds futures contract for May, 2001, was pricing in a 44% probability that the fed would reduce interest rates by 50 basis points. There is a 56% chance of a 25 basis point cut. Bob agrees that its basically a flip of the coin as to whether they cut 25 or 50 basis points. Bob added that if you look at the contracts for June, they are only pricing in a 9% probability for a 25 basis point cut at the FOMC meeting in June.
EC: More on the fed futures contracts:
biz.yahoo.com.
Psychoanalytic EC: Let me weigh in on this question of whether the Fed will lower 25 or 50 basis points on Tuesday's meeting. First off, I am sure most of you, like me, are hoping the Fed cuts interest rates by 50 basis points because the presumption is that the stock market will react more favorable to a larger interest rate cut so I may be projecting my own desires upon my belief that they will cut rates by 50 basis points. My theory is based on a little psychology. Recall that Dr. Alan Greenspan is by nature a gradualist and likes to take things slowly. Despite this typical behavior, Greenshades and the rest of the FOMC members agreed to an interim rate cut of 50 basis points this last month. A startling and drastic measure which indicated that they thought it was imperative to cut rates immediately, rather than wait a few weeks to do it at their regularly scheduled meeting. If they cut only 25 basis points on Tuesday, it makes their prior decision to implement an interim rate cut seem like it was done in haste and not necessary. This might bruise their egos - and let's face it, in the financial world, there is a little too much ego to go around if you know what I mean. So let's all hope that egos prevail and we get a 50 basis point cut. Caution: I wouldn't put too much "stock" in my psychoanalysis!
Caller: What impact do you think the rapid cuts in interest rates will have on the next business cycle? Bob thinks it is too early to tell. The damage done to consumer confidence as a result of the dot.com bubble burst is unknown. To get the economy moving again, you need to get companies to borrow money to purchase plant equipment for example. You also need consumers to spend money. One of the most important indicators Bob looks at in trying to answer this question is to see a positive trend in commercial and industrial loans. One problem currently impacting this indicator is the fact that a very high percentage of assets are already on loan and the loan to deposit ratio is near an all time high. Bob noted that he pointed out in January, 2000, that this entire "situation" would take a long time to work out even up to two years.
EC: Two years ends December 31, 2001. If you measure two years from the peak of the S&P500 on a closing basis, that would end in March, 2002.
Caller: Bob, when do you think MOABO - the Mother of All Buying Opportunities will occur? Bob provided a carefully worded response to this question noting that IF the market presented an opportunity that would qualify as MOABO, in Bob's opinion it would occur sometime between the fourth quarter of this year and the fourth quarter of next year. However, Bob qualified that statement by noting that he will follow the dictates of his long term timing model, and when that model turns bullish -- even if it happens before the fourth quarter of this year -- he will once again become fully invested.
EC: As you know, I have been pointing out that Bob has been avoiding the term "MOABO" like the plague in recent months. Bob has also received a lot of criticism on the message boards for using the term MOABO when he initially issued his sell recommendation, only to later characterize the next buying opportunity as simply the next long term buying opportunity -- in other words, something less than an extraordinary incredible mother of all buying opportunities. Bob didn't have much choice but to address the issue of MOABO since the caller specifically used that phrase. Bob didn't shy away from using the term today, however, and implicitly acknowledged that the next buying opportunity may in fact be the mother of all buying opportunities.
Caller: This caller took Bob's advice and moved out of equities in January. He heard Bob discussing on the radio the fact that money market funds could be in trouble of they owned PG&E commercial paper, and he "interpreted" that advice to mean he should get out of the money market funds, so he took everything out of his money market funds and put them in an intermediate bond fund. This ticked Bob off who explained to the caller that was not what he recommended. Bob told the caller that he could understood if the caller wanting a higher quality money market fund if he was concerned about the quality of his money market fund's commercial paper holding, but to put it in an intermediate bond fund, was an incorrect interpretation of what Bob was talking about. Bob added that his discussion on the risks of money market funds had to do with the potential of owning commercial paper from 9 months ago that may have had its rating lowered during that time. He never told people to take their cash reserves out of money market funds entirely.
EC: Ouch. This caller's "interpretation" of Bob's advice was not accurate. Anyone know his e-mail address? :)
Caller: What do you think your asset allocation should be if you are entering retirement this year? Bob likes an allocation that includes 50% equities and 50% fixed income. Bob noted that at this juncture someone with that allocation may have a portion of their 50% equity allocation in cash reserves if they are following his recommendation. The caller also asked Bob what he thought of investing in corporate bonds, staggering their maturities from 1-5 years. Bob thought it was all right to invest in them if you were purchasing only high quality corporate bonds with ratings of AAA or AA. Bob added that you should take into consideration your state income tax when determining whether to invest in corporate bonds. Why? The caller was from Illinois which had a fixed state income tax of 3% - not to big a deal; however, if you were living in California which has a huge state income tax, up to 9.3%, that would cut into your return big time.
EC: Two of the largest and most influential credit rating institutions are Standard & Poor's and Moody's. They rate their bonds in similar fashions, but it can get confusing if you don't know which rating you are looking at. For example, Standard & Poor's assigns investment grade bonds in four categories (AAA, AA, A, and BBB). Moody's ratings are similar, but use a combination of capital and small letters (Aaa, Aa, A and Baa). Bonds with a triple "A" rating are judged to be of the best quality, carry the smallest degree of investment risk. Interest payments are protected by a large or an exceptionally stable margin and principal is secure. Double "A" bonds are judged to be of high quality as well. Double A and Triple A bonds comprise what are generally referred to as high grade bonds. Another term of art in the bond industry sometimes used are "investment grade" bonds which can refer to AAA, down to BBB (or Aaa to Baa for Moody's). The term "junk bonds" usually refers to bonds with ratings below those levels such as ratings of BB, B, CCC, CC and C (or B, Caa, Ca and C for Moody's). Don't even think about investing in D rated bonds. I think D stands for doo doo. (some baby talk I just picked up)
Caller: This caller is considering purchasing Ginnie Maes - should he invest in them within an IRA or outside an IRA in a taxable account. Bob noted that the problem with investing in Ginnie Maes in a taxable account, is quite simply taxes. You have to pay federal and state income tax. The caller seemed to make up his mind quickly that investing in Ginnie in his taxable account wasn't a good idea. The caller then asked Bob if he thought it would be better to invest in Ginnie Maes or treasuries within an IRA. Bob thought the Ginnie Maes was a great conservative investment to have in your IRA. Later in the weekend, Bob also recommended to a couple in their 70s to use some money they just received to invest in a good no load Ginnie Mae fund for investment income since it was a good conservative investment.
EC: According to Lipper, the best performing Ginnie Mae mutual funds have been Vanguard GNMA, Lexington GNMA, American Century GNMA and Dreyfus Basic GNMA. Not surprising, these are no load funds with low expense ratios. Good basic article on Ginnie Maes that I just found at this link:
thestreet.com.
Caller: This caller had a question about the growth in the money supply and how it is impacting Bob's timing model. Bob acknowledged that there is "modest improvement" in the real growth of the M-1 and M-2 monetary aggregates. A month ago, the year-over-year real growth of M-1 was actually negative 3.4%. This growth rate has improved as a result of the Federal Reserve's interest rate cutting campaign and the latest figure Bob has, shows it at only a negative 2.6% annual growth rate. Recall that M-1 is primarily currency in circulation and the monetary supply the Fed has the most control over. With respect to the M-2 monetary aggregate, which is a broader measure of money supply (it includes M-1 plus non-commercial bank demand deposits, money market mutual fund shares, overnight repurchase agreements between non-commercial lending institutions and some other stuff), that aggregate has gone from a year-over-year increase of 4.4% to 5.2%. Bob thinks there will continue to be improvement in these aggregates, but that it will take time.
EC: The last caller asked one question that Bob didn't have an answer to; namely, whether this improvement in the monetary aggregates will be enough to drive the stock market higher and turn the economy around. In my opinion, this component of Bob's timing model (which he calls the Monetary Indicator) is the one causing Bob the most concern over whether the market has in fact bottomed, or whether we will go back and retest the lows. In reviewing my notes from the summer of 1999, when Bob began to outline that the model was getting close to turning bearish, Bob remained positive, in part, due to the restriction of monetary supply, which the Fed had just began doing when it raised short term interest rates by 25 basis points in July, 1999. Well, we know that Bob's timing model turned bearish in December, 2000, after the Fed was already in the midst of its rate increasing campaign. Today, we sort of are in the opposite scenario. The Fed has already cut interest rates 200 basis points with every indication that they will again cut rates at their next meeting. Certainly, the interest rate easing policy mode the Fed has been in since January warrants consideration as to whether it is helping the economy, and in turn, whether the stock market is on the rode to recovery.
Caller: This caller wanted some advice from Bob on how to select a mutual fund. The caller noted that she has looked at the mutual fund reports by Morningstar as well as the mutual funds recommended by Bob in his newsletter. Bob noted that there is a big difference between him and Morningstar - the main one being that he doesn't recommend or evaluate load funds (funds that have sales charges). Bob further added that when you select a managed mutual fund, you have to consider the fact that it will be very difficult to outperform an unmanaged index fund. Why? Because index funds have low expense ratios, they don't have to pay someone to manage the fund, they have low turnover which means less tax distributions. You have to also consider the transaction costs of managed mutual funds as a result of trading that mutual fund managers do.
EC: Solid advice by Brinker, although he doesn't always practice what he preaches on the radio. Bob's aggressive model portfolios when fully invested contain a selection of managed mutual funds - but that has to do with Bob's attempts to beat the indexes through selection of superior performing mutual funds, a difficult task for even daBrink to do. To Bob's credit, however, a few years back he added what he calls the "active/passive" investment portfolio to his newsletter which detailed how you could be invested in simply one index fund in the United States portion of your asset allocation. I bet you folks can guess what fund that is!
EC: One more point to make relative to the last caller. Bob sort of dismissed Morningstar out-of-hand when in reality, I think they provide a lot of good information when researching mutual funds. Although they do evaluate all types of funds, I just checked out their web site, and you can search for a no load mutual fund with all of the characteristics you are looking for and obtain Morningstar's ratings for that fund. Check out this link to see how it works:
screen.morningstar.com.
Brinker Comment: Bob discussed the price of gasoline and noted that the national average has risen from $1.47 to $1.68 since the beginning of the year. With the summer months ahead, Bob thinks gasoline prices could go even higher. Bob doesn't think it is the fault of "big oil" companies, but rather a supply and demand problem in the United States. We simply are consuming more gasoline than we can supply at a cheap cost. Bob pointed out the heavy cost petroleum companies incur in order to comply with environmental regulations, combined with the fact that there has not been expansion of oil exploration and development. The American Petroleum Institute estimates that 5 to 6 billion dollars is spent annually to comply with environmental regulations.
EC: Check out the American Petroleum Institute home page, which includes a handy list of fuel saving tips for consumers:
api.org
Brinker Comment/EC: Its good to know about exchange traded funds (ETFs) that track the major indexes. SPDRs (pronounced and often referred to as spiders) is an acronym that stands for Standard & Poor's Depository Receipts. They are actually long-term unit investment trusts. The great thing about utilizing the SPDRs instead of a mutual fund is that you can trade them in real-time during the day (if you were so inclined) whereas you have to wait until the end of the day to sell or purchase the S&P500 mutual fund. Basically, they have the same trading benefits of a stock, yet their performance is tied to the S&P500 Index. There are also Diamonds (Ticker: DIA) which track the Dow Jones Industrial Average, and of course QQQ shares which track the Nasdaq 100.
Caller: Why not simply purchase SPDRs (Ticker: SPY) instead of owning a mutual fund that tracks the S&P500. The SPDRs have an expense ratio of 0.12 which is a little lower than the Vanguard S&P500 Index fund which has an expense ratio of 0.18. However, if you are invested in a mutual fund owning the S&P500, you need to factor in the dividends. The dividend yield on the S&P500 is about 1% and if you own a mutual fund that tracks the index, it does it for you without any charge. However, if you are going to collect your dividend from the SPDRs and reinvest it, you are going to incur a commission charge.
EC: SPDRs pay dividends quarterly, versus an open-end index fund like the Vanguard 500 Index which reinvests dividends into new shares as they are paid. The delay of dividend reinvestment with Exchange Traded Funds, like SPDRs is often referred to as "dividend drag." You may want to check with your brokerage house concerning whether they charge for reinvestment of the dividend for SPDRs. If they don't, then the scales may tip in favor of SPDRs versus ownership of the index via a mutual fund.
Caller: This caller wants to hire a professional money management company to manage his money. Do you know of any resources to investigate a company's background to make sure they are up to snuff? Bob noted that one way to protect yourself is to use a large mutual fund family. Bob also cautioned the caller to watch the expenses. The caller said the company he was thinking of using charged a 1% commission, which Bob thought was pretty typical. Bob suggested he find out the company's performance, their assets under management and how long they have been in business. Bob concluded by telling the caller it would be even better if he could learn to become his own investment advisor.
EC: Peter Lynch, the legendary manager of Fidelity's Magellan Fund had this to say about choosing a money advisor in his book, Beating the Street:
"There are no requirements for managing billions of dollars, but before somebody can trim your sideburns, he or she has to pass some sort of test. Given the record of the average fund manager over the last decade, maybe it should be the other way around."
EC: Great quote don't you think! Still interested in finding an advisor? Make sure you check out the National Association of Personal Financial Advisors web site:
napfa.org
Caller: This caller owns AT&T stock (Ticker: T) and wanted Bob's opinion on AT&T's request for approval of two tracking stocks to follow its consumer business and broadband business. Bob said he doesn't own AT&T, nor has he ever owned it and he really didn't have any observation on this issue.
Brinker Comment/EC: AT&T has also proposed to split into four businesses, each operating under the AT&T brand. Bob acknowledged that this is a big deal for the company and will be a major decision for AT&T shareholders as to what to do. The four units are as follows: (1) AT&T Business (enterprise communications and networking provider) which has most of the revenue and profit; (2) AT&T Consumer (consumer communications provider) which has some profit; (3) AT&T wireless (a provider of wireless services) which has marginal profit; and, (4) AT&T Broadband (cable TV and broadband services) which is losing money. If you are conservative investor, then you would want to keep your objectives along the lines they currently are now.
Bob thinks the consumer division (2) would be the most conservative position. Bob pointed out that the business services has 28-1/2 billion in revenue and net income of less than 4 billion, but consumer services as 19 billion in revenue and net income of over than 4 billion which means they are making as much income, on 2/3rds the revenue. In addition, the consumer stock is expected to get most of the dividends paid by AT&T. However, the consumer business is not growing fast, and investors in it will be attracted to the investment income. Bottom line: Bob likes the consumer shares if you are a conservative investor. More on this story at the following link:
biz.yahoo.com.
Caller: Where is the demand for natural gas coming from that has driven the price of the commodity up so much given the weak state of the economy? Bob noted that one of the problems with natural gas is the conversion of long term contracts. Much of the gas is sold under long term contracts. When these contracts come up for renewal, they base the renewal on the market's current price.
EC: A good resource for energy issues is the Energy Services web site:
eia.doe.gov
Caller: This caller wanted Bob's view on whether the treasury yield curve can predict the future of the stock market. Bob noted that historically when there has been an inverted yield curve, there is an increased risk of recession. During the 1990s, we had an inverted yield curve, but so far we have not had a recession.
EC: You may recall that Bob discussed quite frequently last year the issue if an inverted yield curve. The classic yield inversion involves very short term interest rates such as the 91 day treasury bill yield versus the long term 10-year treasury. (Bob used to use the 30-Yr Bond for his analysis). Historically, when the short term interest rate rises to a level higher than the long term interest rates, it has been a forecaster of recession. If you are interested in the seminal study on how an inverted yield curve is used to predict recessions, make sure you read the 1996 article written in the Journal of Economics and Finance, entitled, The Yield Curve as a Predictor of U.S. Recessions. Here is the link:
ny.frb.org.
Caller: This caller's kid is entering a public university college next year which costs $16,000 annually and he wants Bob's advice on whether to pay cash, or should he take a home equity loan at a 8.5% rate. Bob thinks he should pay cash for the education.
EC: $16,000 per year for a public university???? Holy expensive education batman! Let's see, I got about 18 years to save up for my kid's college. Wow. That caller hit home! Speaking of which, several subscribers suggested that I do an editorial on saving for your child's education and related issues. Great idea! I will do some research and have it together in a few weeks. If any of you have some thoughts or ideas on this issue, please e-mail me.
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Brinker in the News
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EC: Bob received some favorable press in the May 13, 2001, San Francisco Examiner in a column written by Martha Smilgis entitled "Go-go gurus get her goat." The columnist mentions John Bogle, Bob Brinker and Warren Buffet among the reputable gurus in the investment world. Here is a link to the article:
examiner.com.
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Nasdaq
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EC: For those of you who like charts and that sort of thing, make sure you check out this daily chart of the Nasdaq prepared by Larry Dudash which shows that the Nasdaq trend line from 9/1/2000 has not been broken, which he views as positive development.
geocities.com.
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Sentiment
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EC: Investor's Intelligence: According to the latest numbers from Barron's, the bullish sentiment (bulls/bulls+bears) from Investor's Intelligence was 56.29% and the 4-week moving average is 52.98%.
EC: AAII. From the American Association of Individual Investors the current reading using the calculation bulls/bulls+bears is 74.96%. Notice this sentiment index has become significantly more bullish within the last month. As a contrarian indicator, we don't like to see that. The four week average is 67.09.
EC: Put/Call. The 10-day put/call ratio stands at .62. Wish it would move a little higher - its going in the wrong direction lately.
EC: I am considering including additional sentiment indicators periodically starting in the next subscription period. If you have any suggestions, please let me know.
Final Thoughts from David K: Do you want to know how to subscribe to my service? E-mail me at:
mailto: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. |
