Sunday, April 13, 2014

April 13, 2014, Bob Brinker's Moneytalk Summary: Stocks, Bonds and Investing Commentary

April 13, 2014.....Bob Brinker hosted Moneytalk today.....(comments welcome)

STOCK MARKET: Brinker did not mention the stock market today even though there has been a 4.3% correction in the S&P 500 Index. Oh wait, Brinker calls that noise.

Honey EC: Currently, Brinker is remaining fully invested in his model portfolios while warning that if you dollar-cost-average new money, be aware that he "expects" the stock market will have a "meaningful correction this year."  
In the April issue of Marketimer, Brinker said: "It would not surprise us to see a correction pave the way to an attractive buying opportunity for patient investors."
It's clear that Brinker is not expecting a bear market at this time. (Remember that he defines a bear market as a decline of 20% or more) But as he has said many times, he is vigilant because of the mid-term off-presidential correction history that has produced at least an 8% decline since 1960.  Also, QE easing will likely be ended in the fourth quarter of this year -- and the new Fed Chair has said that interest rates may rise within 6 months from QE ending. 

Regardless of all of Brinker's  "unenthusiastic" stance, he is still advising Moneytalk listeners to stay in the stock market.  Today,  Brinker told three callers who said they were in or near retirement  that he is "comfortable" with maintaining a "balanced approach" with their retirement funds.

BOND MARKET/INTEREST RATES....Brinker did not talk about interest rates, bond durations or income investing today.

HIGH-FREQUENCY TRADING AND THE FLASH CRASH: Brinker dedicated his opening monologue to these subjects again after spending most of the program on them last week.  He also took several calls on the subject. It was quite repetitious of what he said last week, which I completely covered in my summary of last week's program summary.  I'll cover any new points that he made today.

WILL THERE BE ANY FRONT-RUNNING PROSECUTIONS....Brinker says no because it is not illegal.

HOW THEY LEGALLY MAKE ALL OF US VICTIMS....Brinker said: "Suppose you had a mechanism, or a system by which you could determine in advance when a large institution was putting on a position or buying shares in a company.  Remember a large institution can buy a lot of shares of stocks – hundreds and hundreds of shares,  even a million shares or more.....  Imagine if you knew that this buy was coming into the market and you knew it right away. If you were interested in making money, you could front run this order.  As soon as your system detected that this order was out there and was about to be executed, you could front run that order…  Go to all the exchanges out there that is offering shares and just clean them out at a given price.  Then you would own the shares. Meanwhile you know this institution is coming in with tremendous buying power in the stock – because your system detected that their buying it.…  You're not going long-term.  You are interested only in making money, so you just trade the stock back to them at a markup and you pocket the money – easy money..... Could be an Exchange Traded Fund, could be a mutual fund or index fund, could be a pension fund, could be a charitable group – could be any of those institutions......You knew they were coming in, you swept the board, then you resell the shares right back to them at a markup and you pocket the money.  That's what were talking about – front running."

TAXING HIGH-FREQUENCY TRADES MAY BE THE ANSWER.....Brinker said:  "There is a very easy way to deal with this and they've already done it in Italy.  And that is to put a tax on very short-term holdings.  These are generally flips, they're not sitting around waiting for the next press release on the company… So what they have done in Italy which I suspect is going to bring an end to high-frequency trading, is they put a tax on positions held for less than one half of one second.  In these flips that are done so fast, that would probably be enough to eliminate it."

SINCE THERE IS FRONT-RUNNING (HFT), WHY BUY STOCK AT ALL....Caller Daniel in California asked Brinker why should he buy stock at all in light of all this front-running victimization.

Brinker replied: "The reality is that the stock market has really been the best place to earn a rate of return.  And that is the reason that people invest in the stock market.  So what are we talking is being raked off here by high-frequency trading?  A fraction of 1% is what we're talking about.  On the S&P 500 index I've seen estimates of one quarter of 1%.  And so if the market was up 32% last year, it might be fair to say without the high-frequency traders, it would've been up 32 1/4% – with that quarter of a percent going in their pocket.  And so that's the reason that people have invested in the stock market. Because even if they knew about this, most people would've said you know what, 32% okay.  I'd rather have 32 1/4%, but 32 is okay.  And that's why they include the stock market in their investments."

Honey EC: You have to love Brinker's dry, sarcastic sense of humor. I laughed out loud at his answer to Daniel. 

QUANTITATIVE EASING DID NOT CAUSE INFLATION WHICH IS NEAR ZERO: Brinker's said: "So much has been written about the Quantitative Easing program that the Federal Reserve has been implementing in recent years.  And there's so much lack of understanding about what the Federal Reserve has been doing – of course some people like to use the Federal Reserve as a populist whipping boy.  Generally speaking, these people have no idea what they're talking about, no background in investing, no background in monetary policy and they have no background in economics.  Nor are they surrounded with people with same.  And yet they go out and throw tomatoes at the Federal Reserve Chair without the foggiest notion of what they're talking about.  They've been so wrong.  These ignorant people have been so wrong, it's pathetic. These are the people that told us years ago – this should've already happened except that they were wrong – they told us that Quantitative Easing was going to result in runaway inflation.  Guess what the inflation rate is for the past 12 months – years into Quantitative Easing – it is 1%.  Hardly runaway inflation.  Certainly not hyperinflation.  In fact, almost no inflation at all – 1%.  So those are told us that we should be prepared for runaway inflation because of Quantitative Easing have been proved wrong."

QUANTITATIVE EASING DID NOT CAUSE STOCK MARKET TO GO UP.....Brinker continued: "That's not all.  They told us that Quantitative Easing was the reason that stock market went up.  Well they never mentioned profits, did they.  We are looking at the highest level of corporate profits in the history of the USA.  They don't want to talk to you about the profit part of it, when in fact, anybody who knows about the market knows that profits are at the core of what happened to stock prices.  So they were wrong on that went too.  And they were wrong about the hyperinflation.  You know something -- very very close to a stopped clock – it's only right twice a day."

EMPEROR PUTIN IS ON THE MOVE AGAIN....Brinker's said: "Well unfortunately, Emperor Putin is at it again.  Reports today that Ukrainian security forces have been fighting with pro-Russian gunmen in eastern Ukraine.  Casualties unfortunately reported on both sides of these battles.  Poland, through their representatives, calls this the worst case scenario for Ukraine.  The officials in Ukraine on Saturday, accused Russia of external aggression.  This is because camouflaged gunmen were firing on units deployed by the government in Kiev, and anti-terror operations in eastern Ukraine – about 150 miles from the Russian frontier.  Here we have casualties being reported -- this is obviously more bully, muscle-flexing by Emperor Putin.  He appears to want more of Ukraine than he already has following the annexation of Crimea.…  I think Emperor Putin is bad news and he's starting to show why."

Honey EC: I know Brinker's Putin-commentary might be considered political,  which I have sworn off of covering (for the most part), but I'm sure that Boris Brinkorsky, who broadcasts from the Soyuz space craft Ruble talk -- radio Moscow, reads this blog and may have something to say in rebuttal. 

IN EDIT; Boris Brinkorsky Newsflash:
Bob Brinker said:  "He appears to want more of Ukraine than he already has following the annexation of Crimea.… I think Emperor Putin is bad news and he's starting to show why."

Nyet Bob. Putin wants ALL OF Ukraine.

Boris Brinkorsky
Russia's most trusted financial advisor.

Brinker's guest-speaker was Barbara Weltman: J.K. Lasser's 1001 Deductions and Tax Breaks 2014: Your Complete Guide to Everything Deductible

FrankJ's Summary of the third-hour guest:

Today’s third hour MoneyTalk guest was the redoubtable Barbara Welkman, a frequent passenger on the Starship. Barbara is a font of expert tax advice, and lives up to Bob’s reference to her as a “walking compendium” of the tax code.

You can get a 6 month extension by filing a simple form by April 15. But… you must still pay what you think you owe in order to avoid penalties.

Bob asked about tax relief services … are they worth it? Barbara said that the quality of what they offer is all over the map. The notion of settling for pennies on the dollar is unrealistic. People who simply don’t want to deal with the IRS, or have the time to do so may find them useful. Others may want to deal directly and try to obtain an installment agreement. If you have a huge bill owed and you truly do not have the means to pay, you may get an “offer in compromise” from the IRS to settle the issue for a discounted amount.

Barbara did a quick review of IRAs, telling us that we still have until April 15th to fund an IRA for 2013. Those under 50 years old can sock away $5500, while those 50 years and older can put away a max of $6500. There is a tax deduction available if you contribute to a traditional IRA, no tax deduction available for contributions to a Roth-IRA. Bob asked Barbara the question brought up by a caller who wanted to use his required minimum distribution (from his traditional IRA) to fund a Roth-IRA.

Barbara’s answer was that he could only do this if he had earned income. He would still pay the ordinary income tax owed on the distribution from the traditional IRA.

After the break, Bob moved very quickly through a batting order of callers.

Leading off the line up was a 71 year old woman from Albuquerque who wanted to know about capital gains on the sale of a home. Barbara said if you owned the home for the past 5 years and lived in it for 2 of those years, you can exclude the first $250K of gain if you are single.

Tom, a small business owner from Carson City, NV, said his CPA won’t allow him to deduct maintenance and other costs associated use of his truck for business. Barbara said the CPA is correct, Tom needs to keep a contemporaneous record – either write down mileages daily or get an app for it.

Stanley, also from Albuquerque was up to bat next with a question on deductible legal expenses when there are punitive damages involved. Barbara said some legal costs can be deducted and others have to be itemized and are subject to the 2% rule. Good luck, Stanley.

Bob then jumped in at the clean up batter position and asked about the 50% penalty for failing to take a required minimum distribution as scheduled. Barbara suggested that taxpayers may get some relief from the IRS if they ask, in writing.

Bob also posed the question of when a child inherits an IRA when the parent was already in “RMD mode.” Barbara said, the heir can take out all the money immediately, or, they can take it out within five years, at varying amounts per year as long as it is all withdrawn at the end of the five year period. Thirdly, they can “stretch” the IRA by taking the money out over their life expectancy as given in IRS Publication 590. (Ed. Note: I believe you must pro-actively notify the IRS that this is your choice if you choose to stretch it.) In all cases, the distribution goes into the category of ordinary income for tax purposes.

Richard from Wichita wanted to know if the qualified charitable contribution provision was going to be in force in 2014. Barbara said she thought it would. This allows people to make a charitable contribution with their RMD form an IRA. They avoid paying income tax on the distribution and they also get the deduction. If older than 70.5 years old, you can contribute up to $100K.

David from Texas stepped into the batter’s box and announced he is now retired and “has had it,” with taxes in the US and wants to know what country he could move to. Barbara had no answer for him. Score David as a strike out.

Betty from Pismo Beach, CA forgot to take her IRA distribution in 2013 but took it in January, 2014. Barbara said just attach a statement to your taxes and the IRA may cut you a break. Good luck, Betty.

Debra, listening in Denver said she and her husband sold their home, part of which they used for a home office. (They would have claimed some depreciation on the portion of the home used for the office.) Barbara said depreciation claimed after 1997 would have to be recaptured. This means, put back in the pot and taxed at up to 25%.

John from El Paso makes less than $12,000 per year and is on Social Security. It sounded from his question like this was his only income. Does he have to file? Barbara said it depends on his marital status and age. If John’s only income was Social Security, he wouldn’t have to file – unless for some reason he had withholding taken out, then he would have to file to get that refunded.

Some of the changes to the tax code Barbara said high earners would have to watch for include the loss of some exemptions, loss of some itemized expenses, a larger tax on dividends and capital gains, (going from 15 to 20%) and an increase in the medicare tax on income and investment income.

 Jeffchristie's Moneytalk Final Exam Question
Today Bob Brinker seemed astounded when Barbara Weltman told him that the spousal IRA was named after which female US senator? A) Diane Feinstein.
B) Barbra Boxer.
C) Kay Baily Hutchison.
D) Patty Murray.
 Brinker is touting the book Flash Boys again this week. He says it is on his reading listFlash Boys: A Wall Street Revolt

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.) 

Sunday, April 6, 2014

April 6, 2014, Bob Brinker's Moneytalk Summary: Stocks, Bonds and Investing Commentary

April 6, 2014....Bob Brinker hosted Moneytalk today......(comments welcome)

STOCK MARKET....Brinker didn't mention the stock market except these comments:   "One of the things that is very obvious in this market, and we're talking about a market that as we speak is trading within about 1% of its all-time high --  the S&P 500 index this weekend at 1865 --  is that the retail investor has been largely absent from this market.  There are variety of reasons for this, but one of those reasons is the flash crash."

INVESTORS STILL WORRY ABOUT FLASH CRASH.....Brinker continued: What was it  that happened in May 2010 that cause the Dow Jones Industrial Average, in a matter of minutes, to be down 1000 points after being down 300.  It was down 1000 points only to recover back to 300 in a matter of a few more minutes.  Many have looked at the flash crash and tried to explain it.  Many of the explanations have been pure nonsense including the so-called fat finger explanation – that somebody put a big finger on the wrong button and caused the whole thing -- this is nonsense.  No scientific explanation of what happened in the flash crash has ever been forthcoming.  People are going to look at the high frequency trading and the activities that goes on… And they're going to have to wonder whether there was a connection between what happened between May of 2010 and what goes on with high-frequency trading.

STOCK MARKET IS RIGGED.... Brinker said: An acronym that many people did not know very much about a week ago has become almost a household word, and that acronym is HFT – high frequency trading.  And it's become popularized as a result of a new book by author Michael Lewis, who has been a guest on the broadcast in the past.  He has a new book titled Flash Boys.…  Lewis has made the argument that high-frequency trading has resulted in the stock market being rigged..... So is the stock market rigged because of high-frequency trading?  In the sense that HFT can result in tens of billions of dollars in profits, the answer is yes… It's rigged because all of these gains depend on receiving the information faster and that lets your system spring into action, as I described. It doesn't have to be this way.  This could be done away with with proper oversight and regulation but we don't have that in the United States.  They have it in Australia.…

HFT: HIGH-FREQUENCY TRADING....Brinker said: What is HFT?   Basically, it's trading that involves software driven strategies, usually using super fast computers posting and cancelling orders at rates that are measured in as little as millionths of a second..... Why would anybody want to do this?  The answer is, to make money....Michael Lewis says as of result of high-frequency traders and advanced computers, tens of billions of dollars are made by jumping in front of investors.  And that everybody is victimized by high-frequency trading.  And the fastest traders, the ones with the super-duper computers, figure out stocks investors plan  to buy, jump in front of them by buying them first and then selling them back to the would-be buyers at a higher price......Even Mario Garbelli has said that flash trading is a consumer ripoff.

HOW HFT IS DONE - THEY HAVE "FASTER CARS".... Brinker continued: And some of the firms that are engaged in HFT are placing their computers on the site of the stock exchange just to be sure that its access to price data is as fast as possible.  This practice is known in Wall Street as co-location.  There are other involved in HFT that use technology to obscure their trading intentions for just a few thousandths of a second.  And you really have to wonder what's going on here – tens of billions of dollars being made on this practice.  So I think the best way for a typical investor to look at this is,  it's a race.  There is a race to make money in the canyons of Wall Street, knowing going into the race – just like when you go into the Indy 500 you know if you have the fastest car, you have a pretty good shot.…  Well in this case, if you have the fastest system, you have a pretty good shot to make a buck -- or maybe billions of bucks.  Because if you are the fastest trader you're going to be up to buy everything available as soon as your system detects an institutional order.  As soon as an institutional buyer is detected, you spring into action, then you sell the shares to the institutional buyer at higher prices and you pocket the difference and that's the way this works.…

SPEED IS THE RIGGER'S ADVANTAGE....Brinker continued:  In the words of one Wall Street guru,  the speed advantage is the equivalent of having tomorrow's Wall Street Journal in your hand today.  This is a big deal.  So is the stock market rigged because of high-frequency trading?  In the sense that HFT can result in tens of billions of dollars in profits, the answer is yes… It's rigged because all of these gains depend on receiving the information faster and that lets your system spring into action, as I described. It doesn't have to be this way.  This could be done away with with proper oversight and regulation but we don't have that in the United States.  They have it in Australia.…

 UNBELIEVABLY HOT TOPIC ON WALL STREET.... Brinker continued: I wanted to talk about this on the broadcast today because it's such a hot topic on Wall Street, it's unbelievable.  Now I expect is the people are making money off this system, the rigged system, will defend it.  And I will suggest to you that anybody that is defending the current system is probably in a position to profit from it.  Whereas Michael Lewis, Mario Garbelli, other critics of the system obviously are not making money from high-frequency trading, and  that is what this is about.  You know it's a big deal to come out and say the stock market is rigged.....

HFT IS DE FACTO FRONT-RUNNING....Brinker comments: I think the reason that  de facto front-running  is a proper description of  high-frequency trading  is this, if you devise a system where your software  components can identify in advance, and we are talking thousandths or even a millionth of a second…  Can identify in advance  and institutional buyer coming in to buy a stock…  You immediately  sweep the board of all available shares then you are in a position, since you then on those shares.  to sell them  to the institutional buyer at a higher price..   That is de facto front running.

HOW ARE REGULAR INVESTORS HURT BY HFT....Brinker comments: Individuals investors who, for example invest in mutual funds -- and I think it's a very smart way to invest – any type of mutual funds including ETF's… If they are managed funds for example – people like Mario Garbelli manage a lot of money in mutual funds.  And every shareholder in every mutual fund is being ripped off if tens of billions of dollars is being raked in by high-frequency traders.

FRONT-RUNNING ON LEVEL II TRADES....Caller Tom from Chicago said:  "Anyone out there who wants to experience front running can't do it themselves.  All you have to do is if you have an online account is open up what is called a level II box.  You'll see a bunch of bids and offers dreaming up and down on both sides.  You place an order on either side of that either buy or sell and as soon as you hit the button to place that order another order will jump in front of you immediately and that's an elbow trade."

Honey EC: I trade stocks using Level II and I have seen this happen a myriad of times. Sometimes I have had to change my bid (or ask) several times. And I want a stock bought or sold bad enough, have at times, make my price 2 or 3 cents different from the latest bid or ask price. 

Brinker replied to Tom:  It happens all the time and that's what this is all about Tom. Mario Gabelli talked about this to.  He pointed out that you can see this for example, let's say the stock is trading at $50 a share and there's an offer of 1000 shares there -- but before you get your order in there to buy the stock the order disappears.  His explanation is that they should require that a bid or an offer be held firm for some period of time and that's not the case.

Honey EC: Several people who like Moneytalk, told me that the program today was on the boring side. I agree. Most of the calls were on the topic Brinker introduced and stuck to throughout, the others were totally esoteric.

The April Marketimer is out and I have carefully read it...I would categorize it as also boring.  As he has for some time now, Brinker is predicting a "meaningful correction" in the stock market, and recommending short-duration bond funds. However, he remains fully invested and still recommends dollar-cost-averaging new money.

Brinker's guest-speaker today was Michael Bilton: I Live in the Future & Here's How It Works: Why Your World, Work & Brain Are Being Creatively Disrupted

Jeffchristie's Moneytalk Final Exam Quesion:

Today Bob Brinker talked about HFT. That stands for:
A) Headed for Texas.
B) Horses for tracks.
C) High frequency trading.
D) Here from Trinidad.

Brinker's subject of the day was about high-frequency trading and the rigged stock market -- based on this book by Michael Lewis: Flash Boys: A Wall Street Revolt

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.)