February 19, 2012, Bob Brinker's Moneytalk Show Summary, Excerpts and Commentary

February 19, 2012....Bob Brinker hosted Moneytalk today.....................(comments welcome)

Bob began the show with his usual pep-talk about learning to become your own financial manager so you can avoid shark attacks and eventually reach the Land of Critical Mass where there are "no alarm clocks" and everyone is in the "Cat Bird Seat." Moneytalk is now in its 27th year.

VANGUARD GINNIE MAE FUND (VFIIX) Paul from New York said: "You always recommend the Ginnie Mae Fund from Vanguard, it's in your newsletter. Your show you mention it quite frequently. This talk about the mortgage write-down the Fed has been talking about....Should I be concerned? Is there another bond fund that Vanguard has that I could invest in like the intermediate bond index?"  

Bob replied, "They have many bond funds at the fund family......But you have understand with Ginnie Maes, that the principal and interest is guaranteed by Uncle Sam. It is a full faith and credit guarantee, so that stands behind the mortgages."

Paul continued: "But would the write-downs affect it, maybe the net-asset-value would drop, you know take a big...."  Bob interrupted: "How could that happen if full faith and credit is guaranteed by Uncle Sam? I don't see how that could happen?....The other question that you did not ask is, which is how come the Ginnie Mae Fund is trading at or near its all-time-high? And the answer is because of the fact that Uncle Sam guarantees principle and interest."

Honey EC:  My jaw dropped when I heard Bob say that. Did he completely forget that Ginnie Mae Funds fluctuate with interest rates? I hope that Paul will do his own due diligence and find out that even though the principle of the bonds in the fund are guaranteed, the net-asset-value of the fund certainly is not guaranteed. And while the interest is also guaranteed, the amount of interest the fund pays is not guaranteed.

Bob used to claim that the Vanguard Ginnie Mae Fund could be expected to stay in the 9.50 to $10.50 range. Of course, when interest rates declined to historical lows, the fund went as high as $11.22 last year. At the same time, the yield dropped considerably. It now yields only 3.1% and is trading at $11.07.

Another important item that Bob always fails to disclose to callers when he is receiving kudos for having the Vanguard Ginnie Mae Fund in his portfolios, is that he has drastically reduced holdings in it and  replaced it with higher risk funds, such as DoubleLine Total Return Fund (DLTNX) and Vanguard High Yield Fund (VWEHX).

TREASURY INFLATION PROTECTED BONDS....Bob said:  "I don't use them....My personal opinion is that the base rate that is currently being offered on Treasury Inflation Protected is insufficient to justify using them."

Honey EC: Bob sold all of his TIPS holdings last year 

BOB BRINKER MARKETIMER INCOME PORTFOLIO:  Caller Phillip said he was soon coming into a sizable amount of money.  He wanted some income from it and was willing to take a little more risk than with a CD. He also said he had some money in Ginnie Maes.

Bob explained that there is no risk with fully insured FDIC CDs. Bob said: "I've taken a different approach for those who want to get a better return on their money. In my investment letter, I have published an income portfolio on page 7.....We are generating a rate of return on that portfolio that's way above the CD rate......It's subject to fluctuation.....We had a total rate of return last of just about 7%, and so far this year, we're off to a good start. We own five different no-load mutual funds in that portfolio. By the way, we also include Ginnie Maes in that portfolio as one of the five holdings in the income portfolio....."

Caller Michael from Los Angeles also talked to Bob about his income portfolio and Bob repeated much of what he had already said about it. He told Michael that he "likes it in its entirety" and he likes "the mix, because it gives a tremendous amount of diversity." 

Honey EC: Bob's income portfolio has never been considered part of his official performance record and this is the first year that he's tooted its horn. I guess he's too embarrassed to toot the horns on his three official model portfolios. :)  Last year, the two equity portfolios lost money and did worse than the total stock market. And the balanced portfolio (50% bonds, read about it later in this summary), made 1% last year -- barely matching the total stock market. 

So why has Bob's income portfolio done so well last year? It's very simple -- almost half of it is in high-risk bond funds which are doing great. (That's where I made the most money last year. I own Vanguard and JNK,  not Double Line.)  The income portfolio holds 20% Double Line Total Return Fund, which  is mostly below investment grade,  and 25% Vanguard High Yield Fund (VWEHX). I think it could be argued that Bob's highly-tooted page 7 income portfolio is NOT highly diversified -- as he claims.

BOB BRINKER'S MODEL PORTFOLIO III....Caller Marcus from Virginia Beach said he is a subscriber and has invested in model portfolio III.   Marcus said: "In recent years, I've been reluctant to be fully invested in the portfolio so I set aside about 30% of my funds that would normally be invested in Money Market accounts, of course the return on those is very minor.....Your opinion whether I should put more of that money into holdings in the model portfolio III, say a disproportionate amount, say in Ginnie Maes or the Wellesley Fund that's there. Or whether I should pick something from your income portfolio." 

Bob replied: "Let me explain why we have the two portfolios....We are talking about the balanced portfolio, which is model III as you mentioned. In that portfolio, we have selected fixed income securities, along with income securities which really have good quality, in our view because we take our risk in that portfolio in the equity side.....In the stock market side, in our  no-load fund selection of equities.....And yes, we have an income section to that portfolio, and in that income section, we really do have quality holdings.....

You go over to the income portfolio on page 7 and you see a different risk profile.....You have to ask yourself how did the income portfolio on page 7 make a total return of about 7% in 2011 and doing well in 2012.....The answer is because we have assembled in that portfolio five funds and the totality of the portfolio which diversifies the whole thing and spreads the risk, gives us that return. However, we're not taking a lot of stock market risk in that portfolio. Over 90% of that income portfolio is fixed income securities. Yes, we have a small component of dividend paying stocks in there, but it's less than 10%. So the bottom line in all this, we are taking the risk in our balanced model III in  our stock market portfolios....We are spreading our risk in the income portfolio over several different portfolios....So there are differences here. 

Once you recognize that.....if you make a decision that you want to have two different accounts -- you want to have a model III account, then on the other side, you want to have an income portfolio, that's a decision that you could make as long as you understand the rationale behind each of the portfolios. That's what I think is very important. This is Moneytalk" 

 Honey EC: How interesting that Marcus has not followed Bob's market timing advice. Instead, he raised some cash -- unlike Bob.  As Bob so meticulously explained, model portfolio III is a balanced portfolio, about 50% stock and 50% bonds, Most of the stock portion in that portfolio is in Vanguard Total Stock Market (VTSMX) and Vanguard International and All-World funds. The holdings in portfolio III that are the same as in the income portfolio are Vanguard  Wellesley Income Fund and Vanguard Ginnie Mae Fund. 

HOUSING MARKET:  Bob made the comment today that the housing market looks like it has "turned a corner."

 GREEK BAILOUT... Bob said that he played golf this past weekend with a "gentleman from Belgium."   Bob asked him about Greece and "got an earful" -- lots of negative sentiment in Europe and willingness to "let Greece go." Instead, they got a brand new $171 billion bail-out package.  Bob said: "It's my opinion, and I've come to this view over time...Based on everything I know, the European Union should kick Greece out of the Euro."

PAYROLL TAX 2% REDUCTION DONE DEAL UNTIL END OF YEAR.....Employees pay 4.2%, employers pays 6.2% -- total 10.4%.  The uncapped Medicare payroll  tax is 1.45%  of employees salaries -- employers pay 2.9%.

IN EDIT:  Received via email Monday morning: "I think that you missed a mistake that he made yesterday. When he spoke of the payroll tax deduction for 2012 he mentioned the maximum social security wages as $106,800. That is raised for 2012 to 110,100."


WILL SOCIAL SECURITY GO BROKE....Caller Tom from Carson City said he was concerned that this payroll tax cut was putting Social Security at more risk. Bob said that Social Security situation has to be fixed -- that  they need to slowly increase the retirement age and possibly do means testing.

MASSIVE TAX INCREASES AHEAD.....Bob said:  "The 2001-2003 tax cuts are going to expire on December 31st. That means all of the tax brackets will revert to their prior level on January 1, 2013.....basically go up....Under the new healthcare law, there will be a new tax on the payroll side of 90 basis points for employees.... So the new Medicare tax will be 3.8%, right now it's 2.9...

.In addition to that, there's another new tax in the heathcare law, which is 3.8% in investment income for those individuals making over $200 or households over $250 per years.....And this investment income will cover a montage of categories.....For example, interest, dividends, annuities, royalties, rental income, capital gains, all of those categories will be taxed at 3.8% above those income levels..... Also income that is related to a business that is considered a passive activity. That will also be included.....

So we are looking at tax increases of massive proportions under current law on January 1st.....They are going to have to do something about it, because the tax take out of all of this combined could be $500 billion dollars annually, if no changes were made. Changes will be made....a full plate putting it mildly."

PREFER SELF-DIRECTED IRA.....Caller Karen asked Bob if there was a difference between a 403B and an IRA when it comes to how it will be inherited.  Without really answering the question,  Bob said that she should primarily be concerned about what the money is invested in. He recommended that she roll it into a self-directed IRA with one of the big brokerage houses such as Vanguard or Fidelity. Strangely, Bob never mentions Charles Schwab, but they are equal or better than either of the other two on expenses and diversity of products.
 
SCARED RETAIL INVESTORS AND STOCK MARKET MELT-UPS:   Caller Larry from  Virgina asked Bob if there might be a possible market melt-up if the retail investor comes back into the market.

Bob said: "I think the typical retail investor is scared to death....They are scared because of what happened in 2008. They're scared because of the flash crash event....They are scared because of the recession forecast that was made by a private forecasting firm last summer that scared a lot of people to death. We had people on television talking about a recession coming. It was going to be awful. It created another great buying opportunity. In fact in my investment for purchase again....We put the buy out at 1129. The market closed within 2 or 3% of that in early autumn.....From there, there has been a melt-up. Actually, in the S&P 500, there's been a 23% melt-up since early autumn.....That rally started within about 11 days of that upgrade to attractive for purchase.....The retail investor has not been part of this because this really started nearly 3 years ago and we're up over 100%......Going back to early March 2009.... I think a lot of the retail investors are scared. They are not in the market and they have missed one of the greatest rallies of all time.

You have to ask your self what would the catalyst would make all retail investors....who have missed this tremendous, historic move in the market the last three years.... what would convince them to all rush in and place their buy orders at the same time.......Look at the news flow out of Washington, it's pretty sad. Look at the news flow out of Europe, it's pretty pathetic. People are caught up in the news flow and they are missing the big picture. And the big picture is that corporate earnings have improved dramatically in the U.S.A. and that's what stock prices are about. They're about earnings."

Honey EC: Bob just keeps on relentless in hammering Lakshman Achutan of ECRI who predicted a recession even though he doesn't have what it takes to use the man's name.  How very nice for Bob that he has the radio program and can hammer Achuthan for his mistakes instead of the other way round. Lakshmann would have more fodder than Bob does......Shall I talk for a while about how, instead of scaring retail investors out of the market in time to avoid the biggest bear in 80 years, you kept telling them to stay fully invested and buy, buy, buy all the way down? 

And Mr. Brinker how about hearing you talk about the fact that this big market run-up that you are so ectatic about only means recovering prior losses for anyone who has followed your advice to go all-in at S&P  1450.   

It's clear that Bob is very impressed with the current stock market rally and is still very bullish. Here's a chart that compares this rally to other rallies over the past 100 years. Looks like peanuts in this perspective:

TAXING MUNI BONDS IS AN UGLY THOUGHT....Caller Mike from San Rafael asked Bob what he thought about the presidents idea to tax muni-bonds.

Bob replied: "It's ugly....How do you spell ugly?...this is not what you contracted for when you purchased a tax-exempt security. I own tax-exempt municipal bonds...I own several state general obligations....After 911, I made two purchases of the City of New York -- worked out very well. So this is not what you contracted for, that some president would come along and come up with some idea to start taxing tax-exempt interest....There are some politicians that have never met a tax that they did not fall in love with right away. It's ugly.....It sickens me when I encounter these politicians.   Tax-exempt interest holds down taxes and expenses for states, municipalities, school districts....bridges, airports, you name it....... You should not penalize the people who are putting up the investment capital that makes these lowers expenses....possible......I'll be very frank about it. I think that any politician that wants to tax the interest on tax-exempt bonds, is a fool.....Any politician, of either Party that wants to levy a tax on tax-exempt bonds is a fool!"

Honey EC:  I had not heard this until today. When did contracts in the United States stop meaning anything?  Reuters article: Obama Seeks to Cut Municipal Bond Tax Breaks

SOLO ROTH 401k and THE LAND OF CRITICAL MASS....Caller Carol from  Santa Barbara said she lived in the Land of Critical Mass and has always taken Bob's advice. She said that, like Warren Buffet, she chooses to keep working. She asked Bob if he approved of her moving some money into a "solo Roth 401k." Bob told her yes, but she needed to be sure and follow the rules.

Here is a good article: Understanding the Roth 401k

COMEDY SKIT OF THE DAY: Caller Charles From Amhurst said he wanted to ask Bob a question but first he wanted to know if he could talk to Bob during the week.
Bob huffily told Charles about the Marketimer website and inferred that if it ain't there fuggedabotit and abruptly hung up.

Honey EC: I felt sorry for Charles, but he should have been listening earlier in the program, then he  would have known that you don't ask to speak to a guy who plays golf with the crown-prince of Belgium.  Maybe he should try the White House instead.   (I don't really know who the man was from Belgium that Bob said he played golf with last week.) LOL!

Bob's guest author today was Les Kotzer:  Where There's An Inheritance...

Bob Brinker's Moneytalk on Demand is FREE on KSFO560.  Shows are archived for seven days after broadcast.

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