June 24, 2012, Bob Brinker's Moneytalk: Summary, Excerpts and Commentary

June 24, 2012....Bob Brinker hosted Moneytalk........(comments welcome)

STOCK MARKET: Brinker reported that the S&P 500 Index was up and down for the week, closing out at 1335 -- a 7.8 point change for the week. Year-to-date, the total return is 7.1% -- "ain't too shabby in a zero interest rate world."

DOLLAR COST AVERAGE INTO STOCK MARKET: Caller Mike from Lafayette wanted to know how he should invest new money into the stock market. Brinker said: "At this time, I would dollar-cost-average. If you had called at the end of September last year, because we had an attractive for purchase position on the market in the investment letter at the end of last September, but the S&P was in the lower 1100s then....If you'd placed this call in the summer of 2010, we had an attractive for purchase in the investment letter down around 1030 in the S&P 500. I would have told you to put it all in....So at this point at the 1335 level, my advice is to dollar-cost-average the money in at a level that you are comfortable with....As a general rule, we prefer not to chase the market when it's running up. And we prefer to identify buying opportunities when they occur. And the last two buying opportunities that we've identified in the investment letter were S&P 500 1030, and the S&P bottomed out at 1022 on a closing basis. And S&P 1129 level at the end of September last year, and the S&P was in the process of bottoming out in the 1100's during that period of time."

Honey EC: In spite of the spin that Brinker is putting on this buying-opportunity stuff, his "investment letter" has been in  buy-and-hold mode for the past NINE YEARS.  As for the two Marketimer "buying opportunities" he bragged about, he has never mentioned the ones that came before the last two because the S&P kept dropping like a rock after he published them.  The S&P finally bottomed 677 in March 2009, so those that acted on his mid-1400s "buying opportunity" lost over 50% of their money.  Be warned and be careful about trusting a radio huckster who dishonestly brags about identifying a couple of bottoms after covering up several that he previously published.

BUYING REITS AND PREFERRED STOCK:  Caller Ken from Virginia asked Brinker what he thought about buying REITs or preferred stock to increase income flow. Brinker said: "I think you have to do your homework. If you are going to put any money in a real estate investment trust, I'd be inclined to some diversified format. I know that Vanguard has one that is diversified, there are others out there as well....As far as preferred stocks are concerned, there's been a lot of money lost in preferred stock. A lot of companies that were getting into trouble, Freddie Mac is an example, came out with preferred stocks and they turned out to be less than people had  hoped for. I'd be careful with preferred stocks."

INTEREST RATES: Brinker said to forget about interest rates and recited the current Treasury rates. You can see the list he probably read from here: Treasury Direct

Brinker said: "They (low interest rates) create a level of complacency in Washington. Money can be borrowed at almost no cost at all. In fact, no real cost at all, adjusted for inflation. As a consequence, they keep piling up the national debt. We are headed for $16 trillion dollars and we don't seem to have a political will in Washington to put together a long-term plan, such as a ten-year plan to change all of that. That's unfortunate because this cannot stand over the long-term -- piling up debt like this. Because if and when the day comes when interest rates normalize, the interest on that national debt is going to be gigantic." 

BUYING BOND FUNDS AND MANAGING INTEREST-RATE RISK: Caller Mark from Wisconsin asked about moving his bond holdings from Vanguard Total Bond Index Fund into the Vanguard Short-Term Investment Grade Fund (VFSTX).  Mark thought the dividends were similar.

After pointing out to Mark that the dividend on the short-term fund is 1.6% -- according to the Vanguard website, Brinker replied: "I don't want to denigrate the other point that you are making, which is that you want to manage your interest rate risk, especially given the fact that we are near historic lows on rates. The average duration on the Investment Grade is 2.4, which is less than half of the 5.2 average duration on the Total Bond Fund. I have no recommendations in my investment letter for the Total Bond Fund. We are not using that fund at this time, as a consequence, I would support such a move." 

Honey EC: Brinker is right. He has no portfolio holdings for the Vanguard Total Bond  Index, but he does have a 10% weighting of Vanguard Short Term Investment Grade in model portfolio III, and a 15% weighting in the income portfolio. 

INFLATION INDEXED TREASURIES....Brinker said: "Five year maturities have a negative base rate of 1%. So it costs you the buyer one percent a year to own.....You have to pay 1%, a negative yield on the base rated and you have to hope you'll get something back on the inflation side." 

INFLATION: There were two callers who said that they think there is more inflation than is being reported. Brinker said to caller Ellen from San Francisco: "We have a year-over-year Consumer Price Inflation of 1.7%. ..You have to understand that there are many components to the Consumer Price Index....It is one of the two inflation indexes that best track inflation....The CPI year-over-year for food is 2.8% increase....The year-over-year rate of inflation of Apparel  is 4.4%. We have seen a tiny spike in clothing over the last three months." 

On the same subject, Brinker told Debbie from Indiana, who said she sees prices going up, that she needs to look at "more than one item" and then he moved on to the next caller.

FEDERAL OPEN MARKET COMMITTEE MEETING: Brinker said: "As usual the questions asked by the financial media were disappointing....The critical question that had to be asked of Ben Bernanke was not asked.....The question that begged to be asked was about the efficacy of a hypothetical QE3 program.....Bernanke has indicated it's a possibility some time in the future....But the real question on QE3 has not been asked of Bernanke.  And that is what is the Federal Reserves view of the lag time that would be required for a hypothetical QE3 to have an impact on the economy."

ROTH IRA QUESTION: Caller Tom from Chesapeake asked about the 5-year holding rule on Roth IRAs. He said he had been told that the clock starts when you open the first IRA and subsequent accounts inherit the starting date of the first one.  

Brinker replied: "I would only use common sense on that. I'm not a tax accountant and I don't play one on TV....Common sense would tell me that when you open a Roth IRA account, the clock starts ticking the day you open that account. If you later open another one, I would think the clock starts ticking the day you open that account. But I would defer to whatever IRS regulation would govern that....I think your best source of information on this is either the IRS -- and remember, there have been cases where people have received misinformation from the IRS and they are then held accountable --  if they followed it.....A CPA would be in the best position...to answer that question."

COMEDY SKIT OF THE DAY: 

 Caller Ty from Tennessee said: "I have a dilemma about some Apple Stock I have. I'm wondering if I should sell some to raise cash to buy a house."
Brinker: "How many shares do you own?"
Ty: "About a million."
Brinker: "A million shares? That's 580 million dollars in Apple Stock that you own."

Ty: "Not a million. I'm sorry. A hundred thousand."

Brinker: "You own 100 thousand shares? That's about 5.8 million dollars."
Ty: "Yes"
Brinker: "How much did you invest in Apple?"
TY:  "Roughly, abut 7 million dollars."
Brinker: "You invested 7 million dollars?"
Ty: "Yes."
Brinker: "What year did you invest in Apple?"
TY: "About three years ago."
Brinker: "Ty, if you invested 7 million dollars in Apple three years ago, it would be worth more than 5.8 milllion dollars. Therefore, you're using fuzzy math. This is Moneytalk....." 

 Honey EC: Maybe some of the mathematicians on this blog can look at Brinker's math. I think it might be a bit fuzzy too. LOL! 

POLITICS: I'm not going to cover this subject today since I didn't hear anything that would have any affect on investing or finance. Brinker repeated that he is a "registered independent."

Jeffchristie's Moneytalk Final Exam Question:

 The most frequently heard phrase on Moneytalk is:

A) Hi Bob.  Thanks for taking my call.

B) I owe it all to you Bob.

C) Long time listener and Marketimer subscriber.

D) Andy is on the line from Redwood city. 

Brinker's guest today was Alan Blinder, former vice-chair of the  Federal Reserve and Princeton economics professor. I think the latter position explains the cost of his books. I won't be expecting many of you to make a purchase. LOL:  Macroeconomics: Principles and Policy

San Francisco, Ca. KSFO 560: 1-4pm  (KSFO offers FREE  Moneytalk on Demand  for seven days after broadcast.) You can download and save the Alan Blinder interview for the next seven days. 

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