Sunday, February 7, 2016

February 7, 2016, Bob Brinker's Moneytalk: Stocks, Bonds, Economic and Investing Summary

February 7, 2016.....ROLLING ALONG ON THE FLIGHT OF THE STARSHIP MONEYTALK for two hours, then they beamed out Bob Brinker,  the Captain of the Starship,  so  he could watch the Super Bowl which is playing at Levi Stadium in Santa Clara, California.  (comments welcome)


DIVINING STOCK MARKET PREDICTIONS WITHOUT A  CRYSTAL BALL....Caller Tom from  Michigan asked Brinker what the stock market was going to do over the next 7 to 8 years.

Brinker replied:  Anybody with a crystal ball would be delighted to divine the answer to your question.  But I think there are a number of factors that you can watch to help determine what might happen going forward.  And let me talk about some of those factors because it was a great question that you asked, as difficult as it may be to divine that crystal ball answer.....

BEAR MARKETS STARTS WITH GDP DIPPING INTO RECESSION....BB continued: I certainly think it starts with the gross domestic product (GDP) growth rate......When you take a look at the stock market historically, in almost every case – there are rare exceptions – when you get a bear market, you get a recession usually prior to the bear market.

DEFINITION OF A RECESSION, WE DON'T HAVE ONE....BB continued: A recession is defined – the generally accepted definition – is two consecutive quarters for negative GDP.  In other words, total goods and services actually growing backward over a period of two consecutive quarters.  Now so far we don't even have one, so we are not even close at this point in terms of the data.…  The reason that so important is because economic growth has an impact on corporate profits.

WHAT EXACTLY MAKES UP THE VALUE OF A STOCK....BB continued: And when all is said and done, what is the value of a stock?   The value of a stock is the future total return that a company is going to earn from its business model.  You can parse various sectors like value and things that are hidden on the balance sheet – under-priced land hidden on the balance sheet.  All of that is good stuff but if you are talking about a business model, you are talking about the future cumulative return that you're going to make on your business model.…  Thats your earnings stream.  And from your earnings stream is derived your future dividend stream.…  So you also have things like valuation – that also plays a role.  What kind of price-to-earnings ratio are you going to assign to earnings.

LONG-TERM PRICE-EARNINGS AVERAGE....BB continued: That is varied over time – it's been as low as seven.  The long-term average is 16 to 16 1/2 for the price-earnings ratio.…  So all of these factors come into play.  

MARKETIMER THREE MODEL PORTFOLIOS.....Dave from Denver said:  "I have a question about portfolio three and perhaps portfolio two – maybe kind of in the middle of those two.  What do you think we could expect over the next 20 to 30 years relative to inflation, for return?"
BB replied:  That's a great question.  I think the answer is that if you can get a rate of return on that portfolio a few percentage points above the rate of inflation, then I think you would be doing very well – especially with model three, a balanced portfolio that basically has half of the investments in the stock market at this time in half of the investments in fixed income securities at this time period.  
EQUITIES IN MARKETIMER OFFER INFLATION PROTECTION....BB continued:  Also keep in mind that you are getting inflation protection in all of the portfolios on page 8 of the investment letter because the companies that you own have pricing power.  All companies have pricing power in general over the long term.  So with pricing power, they have the ability to adjust the prices to increase costs and therefore keep you hold with reference to inflation is that regard.  Now there are some exceptions – commodities can certainly be an exception in a situation like this.  But in general if you take a look through a whole portfolio, for the most part you do have pricing power.…  And that's a good reason for you, over long periods of time, to have equity exposure.  Well that's a big deal.  
 Honey EC: As Brinker has said, most of the companies that are offering the inflation protection he was talking about are in the total stock market index. He does not own any single stocks in any of his portfolios. 

OWN HERSHEY and COKE AND AFFORD TO BUY THEM 60 YEARS LATER....BB continued:  I'm going to give you an example.  I can remember as a young sprout back in the day, if I wanted to buy a Hershey bar – which wasn't the most nutritional decision I could've been making.  I was a young sprout what did I know?  So I could buy a Hershey bar that was  a little smaller… and it was five cents.  If you go in now to buy a Hershey bar, it might be a little bigger than it used to be, but it sure not going to be a nickel.  I can remember back in the day being able to buy a relatively small bottle of Coke… I can remember getting them out of the vending machine for a nickel.…  It's a great way to point out how the pricing power of a company over time protection against inflation.…

HOW MODEL PORTFOLIOS DIFFER....BB continued: The difference is portfolios one and two have no bond component.…whereas, portfolio three does have a bond component.  Therefore obviously, you are going to have to expect over time that you are going to get a lower annual rate of return out of a bond portfolio than you are in an equity portfolio…

NO NEED TO BE IN STOCK MARKET ALL THE TIME - GET OUT EVERY 13 YEARS.....BB continued: I'm not saying that you have to be in the equity market all of the time.…  We had a period of time from January 2002 March 2003 where we had most of our auto portfolio assets in cash reserves, for obvious reasons.  But when you can take a favorable view of the market, I don't have a problem with emphasizing the fact that this is giving you that pricing power that is so very valuable to you over a period of time.

Honey EC: Just to set the record straight for those who don't know....Brinker sold 65% of his Marketimer equity holdings in year-2000 and returned what was left of it after the QQQ disaster trades,  to the market in March 2003. His Marketimer model portfolios have been totally invested since then.

HOW FAR DOWN IS THE  CORRECTION RIGHT NOW.....BB continued; If you go back over the past year – let's go back to May of last year, that was the all-time closing high in the S&P 500.…  The S&P 500 – the total Stock market Index – they are trading right now about – and remember you collected the dividend since May – and about 10% on a total return basis – about 10% below their all-time high…

COMPOUNDING IS THE EIGHTH WONDER OF THE WORLD.....BB said: The compounding effect is called the eighth wonder of the world because over time the compounding effect is truly astounding – especially when you have an outstanding fund selection such as I've mentioned – the total Stock market Index.


GUBMINT UNEMPLOYMENT  NUMBERS....Bob Brinker comments:  We had the unemployment report came out on Friday this week… And the unemployment rate declined to 4.9%.  It had been at 5%.…the lowest figure in eight years.  It was February 2008 when the unemployment rate last stood at 4.9%.  Average hourly earnings came in, year over year, at 2 1/2%.  The reason that that is significant is, if you take will headline inflation – which if you use the Federal Reserve's best gauge the personal consumption expenditure index – that's only 4/10 of 1%, so if you subtract that out from the 2 1/2, you have real wage growth of about 2%.…  You are hearing a lot on the campaign trail these days that wages are not growing – that is a boldfaced lie…The number one contributing factor to inflation is higher wages and once you get inflation moving, then the higher wages don't do you much good because you just end up spending them on higher prices.  So this is the kind of wage growth in the past year that you really want to see…

UNDER-EMPLOYMENT, BABY-BOOMER AND WOMEN ARE TO BLAME....BB continued:You hear a lot about the participation rate of the US jobs picture.  But let's be clear on what's going on here so that we understand… We have baby boomers that are retiring – that affects the participation rate.  We have changes going on in the women's workforce.  That affects the participation rate.  So a lot of people have been making a big deal about the fact that we have seen a decline for some time in the participation rate.  But when you look under the hood as to why that is happening, it is much easier to explain… Both the baby boomers retiring and women's workforce participation are factors in the participation rate…

UNDER-EMPLOYMENT AT 10% - SOMEONE NEEDS TO DO SOMETHING.....BB continued:  All in all, the underemployment rate is too high and we know that chair Janet looks at the underemployment rate and that's good.  The underemployment rate stands at 9.9% – and that's too high.  So more has to be done in terms of job creation in order to get into a situation where the underemployment rate looks better than it does now.

Honey here: Brinker did another monologue about the Federal Reserve, but most of it was repetitious from last week. He strongly believes that  the Fed made a mistake raising rates 0.25% in December, and does not think they should plan to raise them in March. Although, he does not think that the December rate rise will "sink the Titanic." He strongly suggests that they not blab so much.

When Bob Brinker was young sprout he could buy a Hershey bar or a bottle of coke for:
A) 5 cents. B) 10 cents. C) 25 cents. D) 50 cents.
Honey here: Wow, Professor Jeff, those are great nostalgic photos. I'm sure Bob will enjoy seeing them. I wonder what a Hershey bar and a Coke would cost now. Obviously Brinker didn't know and I don't either.

Los Angeles. KABC 790. Moneytalk plays two hours later in the evening. They podcast and ARCHIVE podcasts.

 (summary posted at 6:42pm PT)

Sunday, January 31, 2016

January 31, 2016, Bob Brinker's Moneytalk: Stocks, Bonds, Economic and Investing Summary

January 31, 2016...Bob Brinker  hosted Moneytalk live today.....(comments welcome)

STOCK MARKET NOW  DEPENDENT ON CORPORATE EARNINGS..... Brinker said: I really think that the lifeblood of the stock market – assuming you don't have distortions in interest rates and inflation, assuming you don't have rapidly rising interest rates – we don't have that, assuming you don't have hyper inflation – we don't have that. I think that the life blood of the stock market is corporate earnings.  I think that corporate earnings are the key determinant of what happens to stock prices.

STOCK MARKET NOW FULLY VALUED....BB continued:  Look what we've been seeing here.  We been seeing stock prices move up to a valuation level that, in my opinion, has basically been a fully valued valuation level – or close to it.  Certainly at the recent highs last year in the low 2100s of the S&P 500 index.  So then, you become dependent on earnings because you have a price-earnings ratio.  Well, we have price and then we have earnings.  Once you get to a full valuation level, then you are really dependent on earnings because that's the only other variable in there.…  And you do need earnings growth in order to support a rising market.

STOCK MARKET STUCK UNTIL CORPORATE EARNINGS GROW....BB continued: And in the absence of earnings growth, it's almost impossible to get a rising market.  And I think that is what we have been seeing since 2015 where we have seen a soft patch in the economy.  We've seen the market on a multiple valuation basis reach a level from which it can't expand further......So then investors really focus in on earnings – they become more important than ever.

Honey EC:  I was pleased to hear Brinker give all of this stock market information on the air today. The average S&P 500 index price-to-earnings ratio over the past fifty years is 16 to 16.5 times operating earnings. 

Here are the P/E ratio numbers that he estimated in the January 2016 Marketimer. 
Brinker wrote:  "Our PE ratio estimate of 16.5 to 17.5 times operating earnings reflects our view that inflation will remain low this year thereby supporting a slightly higher valuation level.  Since we do not anticipate a PE ratio level above are estimated range, investors will be forced to rely on earnings progress in order to support higher prices.  Based on our current $126 S&P 500 operating earnings estimate for 2016, the S&P 500 index has the potential to challenge the 2200 level going forward."
RATE INCREASE DID NOT CAUSE JANUARY STOCK MKT SLIDE....BB comments: I don't think that one quarter of 1% did that to the stock market.  The proof is that at year end, the S&P 500 was at 2040, so it was only a few percent below its all-time high and that was a couple weeks after the rates were increased.  I don't think one quarter of 1% was the issue.

SO WHAT DID CAUSE THE JANUARY STOCK MKT SLIDE: BB continued:  I think the primary issue was what happened in very early January, when inexplicably, the vice chairman of the Federal Reserve told an interviewer that four additional rate increases this year are in the ballpark.  And it was right around that time, that the market started to slide.  I think that was a mistake on his part.  I think it was an irresponsible comment on his part – that's my opinion.

FEDERAL RESERVE WALKED RATE HIKE DOG BACK:  BB continued: And I was very happy that last week, they walked the dog back.  They put that whole idea that they are going to go crazy with rate hikes to rest in this statement.  I think it was completely inadvisable.…  The market was very unhappy he did it.…  The time to raise rates is when inflation is a problem – when economic growth is to rapid – we don't have that.

SAVERS ARE FED'S COLLATERAL DAMAGE: BB continued:  I believe this to be true and I've said this before, savers are collateral damage when it comes to lower rates.  Federal Reserve lowers rates for one reason and that is to encourage borrowing, encourage hiring, and try to stimulate economic growth.…
FEDERAL RESERVE'S QE PUSHING ON A STRING PARLANCE....BB comments: Pushing on a string in Federal Reserve parlance, has to do with the ability of an easing of monetary policy to stimulate the economy.  Look how much easing we have seen in the last several years.  We have seen what I would call an unprecedented amount.…  Many of you are familiar with the three extensive quantitative easing programs.  What the Fed did there is, they bought a lot of treasury securities, put them on their balance sheet – they collect the interest… more importantly, they paid for these securities, put this money into the money supply.  They create the money to do this because they can.  And the intention was to flood the system with greenbacks to stimulate the economy.…

THREE FED QUANTITATIVE EASINGS GOT US UP TO 2% GDP....BB continued: What does that mean after several years of seeing the GDP in the 2% area per year.…  Here we have the most aggressive monetary policy ever – certainly in my lifetime.  And we have an annual economy that is been plugging along at about 2% per year.…  How could this happen with the Federal Reserve priming the pump like it's going out of style?…

STUDY SHOWS FED RAISING RATES HELPS MORE THAN LOWERING.....BB continued: The St. Louis Federal Reserve has done a fascinating study which measures the impact of monetary policy during periods of when rates are going up and also when rates are going down.  And this is what they have found.  The study shows that when rates are going up, the cumulative impact on GDP is -1.2%.  So the suggestion is that when you are in an upgrade cycle, you are taking 1.2% off of GDP over time.  The same study concludes when rates are going down, you only add about one half of 1% to GDP over time.…  That is a relationship of 12 to 5 in favor of rate increases slowing the economy versus rate decreases increasing economic growth.…  This means that the act of raising interest rates is more than twice as effective in slowing down the economy as the act of lowering the interest rates is in enhancing recovery.…  It's fair to say that rate increases have significantly more impact on economic growth than lower interest rates.…

Honey EC: I can't imagine what the point was that Brinker was trying to make....But I think that whole study needs to be studied some more. 

MORE REASONS WHY FED BLUNDERED IN DECEMBER....BB continued: So now we have another reason to wonder why in the world the Federal Reserve increased interest rates in December.  We already had a list of reasons why they should not have raised interest rates.…  The strong dollar – it raises the cost of doing business across the board – and fragile international economy.  I think we saw a poor job by the Federal Reserve in December in terms of assessing economic risk and that is what set in motion the events of January.

FED DID BETTER LAST WEEK, BUT NEED TO STOP THE JIBBER-JABBER......BB continued: A better job was done by the Fed this past week at their meeting because they kept rates unchanged – as they should've done in December.  Hopefully, the Federal Reserve will stop all the jibber-jabber – have you ever heard so many speeches??  I mean they turned the Federal Reserve into a jabber fast.…  Which is kind of ridiculous since they claim to be data dependent.


Bob Brinker said the Federal Reserve is becoming:

A) A joke fest.
B) A jive fest.
C) A jabber fest.
D) A love fest.

Brinker's guest-author was Ashley Vance: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

Honey here: Our BRT member, Frankj, was not available to summarize the third-hour today. After listening to Ashley Vance, I would recommend his book. It sounds like Elon Musk has led a very interesting life - and more to come.

Los Angeles. KABC 790. Moneytalk plays two hours later in the evening. They podcast and ARCHIVE podcasts.

 (summary posted at 6:40pm PT)