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.
JOBS AND UNEMPLOYMENT
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.
JEFFCHRISTIE'S MONEYTALK FINAL EXAM QUESTION
When Bob Brinker was young sprout he could buy a Hershey bar or a bottle of coke for: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.
A) 5 cents. B) 10 cents. C) 25 cents. D) 50 cents.
Los Angeles. KABC 790. Moneytalk plays two hours later in the evening. They podcast and ARCHIVE podcasts.
(summary posted at 6:42pm PT)