STOCK MARKET....(Brinker's only comments about the stock market were in a response to 69 year-old Ken from Aptos.) Brinker comments: Let me share with you a balanced allocation that I would be comfortable with at this time.… In a balanced account, this will add up to 100%. You can have 50% in your income portfolio -- and I would be limiting interest rate risk at this time........... on the stock market side, we would be comfortable with a 40% allocation in the US stock market and a 10% allocation in the international markets…
Honey EC: As Brinker indicated in that answer to Ken, there have been absolutely no changes in his stock market outlook from last week. Marketimer should be out late next week. I do not expect any changes in it.
BOND MARKET/LOW DURATION/FED RAISE RATES IN 2015.....Brinker continued: We have an average duration in our Marketimer income portfolio of 1.1 years. Very short duration now. Because we do not want to take interest rate risk as we move closer to it. When the Federal Reserve is going to be raising short-term interest rates. Which we're sure they are going to be doing by 2015...... on the stock market side, we would be comfortable with a 40% allocation in the US stock market and a 10% allocation in the international markets…
ECONOMY IN RECOVERY/BOND CREDIT RISK OKAY..... Brinker continued: And we are willing to take some credit risk in that income portfolio. And the reason for that is, we anticipate a continuation of the economic recovery, albeit a gradual recovery. Nonetheless, a recovery for sure – we can see that in the jobs data… And for that reason were okay taking some credit risk at this time and as a trade-off keeping the duration of the portfolio very low.
IF YOU HAVE A CHOICE, PUT STOCKS IN TAXABLE ACCOUNTS AND BONDS IN TAX-SHELTERED: Brinker continued: Yes I do think it makes good sense to put your investments in your tax privileged accounts that are not going to give you tax privileges under the tax code. Now what are those? Those are income investments. For example if you earn taxable interest, I think the best place to earn that interest is in a tax privileged account..... That way, to the extent that you can put your equities in a taxable account, you have a built in advantage because you have the maximum federal capital gains tax of 20% – for high earners can be as high as 23.8% with the healthcare tax thrown in. But that's still below the top marginal rate on earned income of 39.6. So you want to be putting the interest-based income in a tax privileged account so you can benefit from them and have equity investments in a taxable account.
IF YOU HAVE A CHOICE WHEN YOU RE-BALANCE, DO IT IN TAX-PRIVILEGED ACCOUNTS....Brinker comments: To the extent that you can rebalance in tax privileged accounts and achieve the same overall top down as set allocation that you desire, that's the perfect way to do it. When you focus your rebalancing in the tax privileged accounts, you don't have to pay taxes on those transactions right now.… What if you're forced to do rebalancing in taxable accounts, then I think you want to do that to the minimum level possible.
INFLATION/CPI....Brinker comments: The Consumer Price Index information was released this week and we don't want to see the numbers continue at the level they have been the last quarter. The number for the month of June was 3/10 of 1%..... when taken together in the second quarter – April, May, and June, the annual rate of inflation as measured by the Consumer Price Index came in at 4%. That is too high and is not a number we want to continue to see.… We are not seeing acceleration in the core price on a six-month annual basis even though on the headline number we certainly have seen a higher number with that annual 4.0… The important thing here is that the price gauge that the Federal Reserve uses remains tame.
HOUSING MARKET...New home sales disappointing -- declined 8%.
JOB MARKET...Claims for unemployment benefits down....
NEW SEC RULE ABOUT MONEY MARKET FUNDS....Brinker's opening monologue covered this subject:
There was a meeting this week. A decision was reached. The meeting was a SEC with a final vote 3 to 2 in favor of changing the rules for money market mutual funds in the institutional money market category about one third of money market assets are in the institutional category and those funds are up for change in policy – although there is a very long tail on implementation because there is a two-year period allowing companies to comply with the new regulation. Money market purchase short-term debt which is issued by companies, governments, other borrowers. These funds are used for a variety of purposes including raising cash for payrolls and other short-term expenses.MONEY MARKETS THAT ARE EXCLUDED FROM NEW RULE....Brinker comments: "About one third of the money market money is affected by this ruling, and keep in mind that two-year compliance window means that in a lot of cases you will see the funds waiting the full two years before implementation. Because no matter what the publicity department puts out in terms of spin on this ruling… I am positive that deep down internally they do not like this ruling. Because this is going to force them that they have to price those funds on a daily basis in order to find out what the net asset value is. I can guarantee you they don't want any part of that job. But the prime money market funds and the government money market funds are not affected by this.… I spoke with Vanguard on Friday the day after the ruling and I was told that the Prime Money Market Fund is not affected by this ruling."
This new rule will require institutional money market funds to allow their share prices to float with the value of the securities in the portfolio. According to the SEC, this floating share price rule will make investors less likely to pull out cash when a fund declines in value because they would not want to sell at a loss. That's the theory that is behind this law.
There are critics of this law… Some say shareholders are going to be tempted to take money out whenever they think they might lock up their money. And certainly that's a possibility. Jeffrey Gordon at the Columbia Law school has an opinion, quote: "the rule adoption regarding money market funds is the single most discouraging regulatory action taken post crisis. Strong industry pressure and administrative agency that is focused on turf protection for the benefit of its clients and shortsighted leadership will open the door for the next financial crisis. Unquote.
So this is a big change even though run-of-the-mill retail money market funds will not be affected by this rule, it is going to have an impact on the large institutional money market funds. And I think that there are many investors that have money in these institutional money market funds that are going to say… I'm not in this fund so I can watch the price of the fund fluctuate with the floating net asset value… I'm interested in the fund remaining a dollar a share. So I think you will see a change going forward – you have two years for this for implementation and compliance. – And how institutional investors use money market funds......Money market fund assets are measured in the trillions of dollars.
FIGURING OUT HOW MUCH OF YOUR SOCIAL SECURITY IS TAXABLE....Brinker advised Don from Santa Cruz to contact a CPA/Enrolled Agent to help him figure out how much of his Social Security is taxable. "Staff member" (LOL), Jeffchristie, sent a cheaper way to figure it out on your own: Uncle Fed Tax Board
IN EDIT: "Staff member" ETF1 Robert has covered the call about how to figure the cost basis on a stock that was owned since 1960. Brinker basically told the caller to consult a CPA. Robert's answer is much more complete: LINK
"Staff-member" (LOL), Frankj's, Third-Hour Guest Summary
Bitcoins are a virtual currency that came on the scene in 2008. They are the invention of an anonymous tech guru. According to the guest, there will only be 21 million bit coins ever “mined”. You don’t mine them with a pick and shovel, you “mine” them with a computer or a bit coin mining hardware device. In 2008, you could mine them with a laptop, but today, you need a more sophisticated machine which you can purchase from various companies, one being Butterfly Labs which is also involved in a lawsuit over their business practices.
Like the gold rushes of old, the ones who really made the money were those who sold picks, shovels and other supplies to the miners.
Your computing device “runs algorithms” in order to mine bitcoins. There was no discussion of these algorithms and what they actually do. Approximately 12 million bitcoins have been mined to date. The price currently is about $594. It has been as high as $1200. I found a price chart by just typing “bit coin prices” in Google.
One of the attractions of bitcoins is their anonymity. But this gives bitcoins a certain taint, and Bob mentioned they are used by criminals, drug dealers and money launderers. The inventor is anonymous and this prompted Bob to plumb the depths of his film knowledge and threw out “Yeah, they could have invented by Keyser Soze.” (This is pronounced Soh-zay). Soze is the fictional, criminal mastermind in the movie Usual Suspects.
The guest said he thinks the few businesses accepting them like Dell, Expedia and Overstock are doing it to appear cool. Bob asked what would cause their unit value to increase. The guest gave a sort of convoluted answer that ended up with the conclusion that more retailers would have to find a use for them. The guest mentioned Silicon Valley’s interest in bitcoins a couple of times.
Bob seemed skeptical about the whole thing, asking at one point if it was ripe for a scam? The guest agreed and explained the Butterfly Labs situation where they took orders for very expensive bit coin mining hardware and then apparently did not deliver.
The guest mentioned www.bitcoinfoundation.org as a website for people who are interested in learning more about bitcoins.
Jeffchristie's Moneytalk Final Exam Question
Bob Brinker refers to children as:
B) Rug rats.
C) Crumb crunchers.
D) Young sprouts.
Comical Moneytalk Factoid: This is the third time that caller Tom from Florida has called the program and told Brinker that he had met him at George Mason University. The first two times he called was on Super Bowl Sundays. LINK.
Comical Moneytalk Factoid II: Bob from Henderson, who called today about an esoteric 401K question, is also a frequent flier on the Star Bus. Is he Brinker's neighbor? LINK
San Francisco, Ca. KSFO 560: 1-4pm (KSFO archives Moneytalk Free on Demand for seven days after broadcast. You can download and listen on the go.)