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:
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.Brinker is touting the book Flash Boys again this week. He says it is on his reading list: Flash Boys: A Wall Street Revolt
B) Barbra Boxer.
C) Kay Baily Hutchison.
D) Patty Murray.
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.)