February 17, 2013, Bob Brinker's Moneytalk: Summary, Excerpts, Commentary and Discussion

February 17, 2013....Bob Brinker hosted Moneytalk today. (comments welcome)

STOCK MARKET....Brinker said: "As we look forward to the week, we see a market that has had an incredible, almost straight up run. And now sits at 1519 in the S&P 500 and very close to 14,000 on the Dow.

STOCK MARKET WARNING....Brinker said: "Those indexes (Dow, S&P and Nasdaq) are all at or close to their 2013 year-to-date highs. And also at or near their highest levels in several years. There is a lot, there a lot of bullish sentiment  out there right now. If you look at the sentiment indicators,  a lot of the indicators are showing that there is a very high level of bullishness out there. Whenever you see that, you always have to recognize that, usually, at some point, those levels of over-enthusiasm, of over-zealous participation are very frequently cause for profit-taking. So if you see some profit-taking coming into the market, you should not be surprised when you consider the fact that there is such a very high level of bullish sentiment in a number of indicators out there right now."

Honey EC: It's been a very long time since I have heard Brinker actually give a cautionary warning like that on the air. Kudos to you, Bob! You sounded like the Bob Brinker that made me a fan twenty-six years ago.  NOTE: Brinker has NOT raised any cash and is still fully invested.

INFLATION BEHAVING WELL... Brinker said: "We get the Consumer Price Index data on Thursday... prices have been behaving well. CPI estimated for the month to go up a tenth of a percent. It was flat last month. The core number is expected to go up 2/10 of 1%. If that comes in, then the headline number would be 1.6 and the core number would be 1.8, so inflation continuing to behave very well."

UNEMPLOYMENT...Brinker said: "Initial claims for unemployment insurance on Thursday estimated at 355,000. Big drop last week down to 341,000....We want to see this number under 400,000. It's been there and its been staying there. That's why we have seen the jobs growth that you have seen. We've seen decent jobs growth for the past two years."

INCREASE TAX BY CHANGING DEDUCTIONS FOR HIGH EARNERS: Brinker said that the president's so-called "balanced approach" will include tax increase aimed at high earners. There are five areas where taxes will be increased with reductions in deductions. 1. Reduce mortgage interest $million cap or means test (second home deduction). Remove deductions for state and local taxes (They've already done it for AMT victims.). 3. Set income cap on charity deductions (president already proposed cap).  4. Tax employer health care benefits. 5. Change rules on municipal income taxes.

Honey EC: Brinker seemed convinced that this would only hit the wealthy and high-earners. I don't agree. I think that many of these deductions are enjoyed by the middle-class. 

WHEN TO KNOW INTEREST RATES WILL RISE: Caller Ned from Ohio wanted to know what signals to look for in order to know when interest rates would rise.

INTEREST RATE WARNING.....Brinker replied: "I think it's very important for all Moneytalk listeners to take note of the fact that the high risk in the bond market now is in the high-duration investing......My recommendation is to keep those durations on the shorter end.....The indicators that I follow on interest rates are far too numerous to mention. But let me highlight a couple that I think are very important. One of them is Federal Reserve Monetary policy." (Brinker explained how the low rates have helped unemployment and the housing market.) There's one more that I want to touch on and that's the economic growth rate. If you're looking at the economic growth rate above trend, and trend is still thought to be in the area of 3%, then chances are you're going to see some inflation and interest rate activity."

DON'T BUY TREASURY INFLATION PROTECTED SECURITIES (TIPS)....Brinker said: "I would not be using TIPS in here. My personal view is they are over-priced, over-valued."

SEQUESTRATION CUTS DROP IN THE BUCKET....Brinker said: "The Sequestration that we are talking about now is the $85 billion scheduled to take affect in less than two weeks on March 1st....The amazing thing about this is that this is a drop in the bucket."

TAKING IRA RMD FROM ONE ACCOUNT INSTEAD OF EACH ACCOUNT: Caller Dale from Denver asked a question like this: "Can an account owner just take a RMD from one account instead of separately from each account?"

THE IRS ANSWER: "An IRA owner must calculate the RMD separately for each IRA that he or she owns, but can withdraw the total amount from one or more of the IRAs. Similarly, a 403(b) contract owner must calculate the RMD separately for each 403(b) contract that he or she owns, but can take the total amount from one or more of the 403(b) contracts.  However, RMDs required from other types of retirement plans, such as 401(k) and 457(b) plans have to be taken separately from each of those plan accounts."

HOW TO BUY BRINKER'S NON-VANGUARD RECOMMENDED MUTUAL FUNDS: Caller Brad from New Orleans, who said he follows Brinker's model portfolio III, asked about the best way to buy mutual funds that Brinker recommends that are not Vanguard. 

Brinker replied: "If you buy it directly from the mutual fund, that's usually the least expensive way to buy it.....If you going to use a third party, whether it be Vanguard  or Fidelity (Honey EC: or Charles Schwab) brokerage, very frequently, you are going to have to pay a fee....That's an additional transaction expense." 

WARREN BUFFET FORCES TAX INCREASE ON HEINZ CO. SHAREHOLDERS: Caller Bob from San Francisco said he was long-term Heinz stock holder and wanted to hold it much longer. He was really ticked off  about Warren Buffett's purchase because it meant he (Bob) had to sell for cash if the deal went through and then pay big  capital gains tax on it.  He said that the same thing happened because of Buffett when Mars purchased Wrigley. 

Brinker agreed with the caller that he was going to have to pay a large amount of taxes since he was a high-earner in California. Brinker said: "There is a real irony here....The same person who perpretrated this takeover, the Sage of Omaha, has been out there for the past couple of years, campaigning, beating the drums, on increasing the tax rates. Then he comes in with this bid, and in Bob's case, he could lose 35% overnight on the tax bill....Amazing stuff, huh?"

HEINZ CO. SUSPICIOUS INSIDE TRADE:  Brinker's comments summarized:  Right after it was announced that H. J. Heinz Co. was being taken private at almost $72.5 billion in an offer by Warren Buffet, we learned that the SEC is suing some traders for suspicious trading activities.  No wonder some investors have left the stock market when this kind of thing happens. The SEC complaint alleges that traders earned $1.7 million by purchasing out-of-the-money call options just before the announcement was made. The trades took place in Zurich. They will probably find the people involved and go after them. 

The following summary and editorial comments written by guest-writer, Frank J: 

A summary of the interview with Alan Blinder on MoneyTalk, February 17, 2013. 

Alan Blinder was Bob’s guest in this Sunday’s third hour. Mr. Blinder is a Professor of Economics at Princeton, a contributor to the editorial pages of the Wall Street Journal, and a former member of the Federal Reserve. Blinder’s book, After the Music Stopped, is an examination of the economic meltdown and the reaction to it. The book is now on Bob Brinker’s reading list on his website.

Mr. Blinder said that the book came about as a result of the economic meltdown, which was a big, complicated mess that few Americans understand. He delayed writing the book because he “wanted to see how this play ends.” As to what happened, Blinder said we built a fragile financial system, and there was a desire to build complicated derivatives on top of mortgages. All this activity was predicated on the housing bubble continuing. People should have known that home prices would not continue upwards, and it didn’t help that regulators were looking the other way.

Blinder pointed out that there were “$200 – 300 billion of bad mortgages, … $600 billion at most.” The problem was that “trillions” in investments were built on top of these mortgages and institutions were too heavily leveraged. The topic of March 2009 market bottom came up and Bob Brinker asked if the fear that the banking system was going to go under was legitimate. Mr. Blinder’s answer was yes – however, he cited some actions by the federal government that he thought helped prop up the banking system: 1) the stimulus bill had been passed a few weeks earlier, 2) Treasury Sec. Tim Geithner had announced the need for stress tests on banks, 3) and the TARP program was operating, having been put in place in late 2008.

Bob asked if we have learned anything? Mr. Blinder’s answer was probably not enough, and he wondered out loud whether we would actually remember what we learned. Blinder pointed out a few things that we already knew: being excessively rich can be hazardous to your financial health. We knew that any unregulated financial system tends to go to excess; people get irrationally exuberant and begin doing things they shouldn’t. He said when this happens, the regulator’s role is to mitigate. The Federal Reserve “missed” all this because a lot of the worst mortgages were coming from outside the banking system. But, Blinder added that there were “disgraceful lending standards” and the Fed should have taken action against.

Bob hypothesized that the federal government made a conscious decision NOT to save Lehmann brothers. The guest agreed and said the decision by the government to let Lehmann go bankrupt was a mistake. He believed it could have been saved like Bear Stearns. The resulting confusion over the “rules of the game” led to a freezing of worldwide credit markets. When it came to AIG, the Fed and the Treasury found ways to stretch the law and help that company.

Bob asked if the “too big to fail” concept was the same as a license to do harm (by large financial institutions and traders). Blinder said the Dodd-Frank legislation in 2010 did away with the “TBTF” notion because if a bank looks like it is failing, the legislation calls for an orderly liquidation by the FDIC. Bob mentioned Republican presidential primary candidates who called for Dodd-Frank to be abolished, citing government actions as the cause of the meltdown. Mr. Blinder dismissed this and said the cause of the meltdown was government INACTION, and the notion of repealing Dodd-Frank was “beyond the Pale.”

Editorial comment: Not mentioned with regard to government actions in the form of the Community Reinvestment Act, and the activities of those quasi-government agencies, Fannie Mae and Freddy Mac. 

Carl, calling from WLS country asked a two part question, had Glass Steagall been in place would it have made a difference? And, if the original uptick rule was in place would that have slowed the downturn?

Editorial comment: At this point, MoneyTalk regulars might have listened a little closer because Bob has commented many, many times on the folly of repealing Glass Steagal and the lack of enforcement of the uptick rule. 

Mr. Blinder said that there were many bad practices and “zero” would have been prevented by Glass-Steagall. Only the Citigroup merger would have been stopped. He said that the repeal of Glass Steagall played “a very, very small role if any.” He dismissed the uptick rule as “speed bump” (to those who would short a security).

Honey EC: Thank you for that great summary, Frank. I can't believe that Brinker actually let those comments about Glass-Steagall go by unchallenged. As you said, he has repeatedly talked about how its repeal by "both Parties" was responsible for the housing-banking crises of 2008.

Jeffchristie's Moneytalk Final Exam Question: 

When Bob Brinker takes calls from people listening on the great KNUS radio he frequently says they are calling from: 

A) The emerald city.
B) The windy city.
C) The mile high city.
D) They city that never sleeps. 

Answer:    710knus

Brinker said he will be adding Blinder's new book to his recommended reading list:  After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead

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.)  

READ AND POST COMMENTS