August 5, 2012, Bob Brinker's Moneytalk Summary, Excerpts and Commentary Part TWO

August 6, 2012....Bob Brinker's Moneytalk: Hour Two  (Part one is posted here)

David Korn covered a very important call from late in the second hour. David has over twelve years experience reporting Bob Brinker's history and adds his own unique perspective. I think you will enjoy reading David's commentary more than you would the actual transcription of the call. This is from David's weekly newsletter which contains a summary of Moneytalk. Posted with the author's permission:  

WHEN BOB'S TIMING MODEL TURNS BEARISH

Caller:  When your timing model indicates a secular bear market is coming,
will you invest in inverse ETFs?  Bob corrected the caller saying he must
have meant a "cyclical" (not secular) bear market, because we have been in a
secular bear market since 2000.

(David) EC:  I can understand why the caller was confused.  Bob did a flip flop on
the secular bear market outlook in the summer of 2007 when he declared the
secular bear market had ended (retroactively designating the end as a year
earlier in June 2006).  I remember writing that I thought Bob was wrong at
the time to declare an end to the secular bear market based on my view that
p/e ratios had not returned to their long-term averages.  In May 2009, which
followed the brutal bear market, Bob reversed course and said there is no
question that the secular bear market megatrend remained in tact.  For what
its worth, at various times, Bob has said that his timing model work is
based on cyclical (not secular) trends.

Caller continued:  The caller then followed up by asking whether Bob would
use inverse (bear market) mutual funds if his timing model indicated a
cyclical bear market was coming.  Bob said if his timing model indicates a
cyclical bear market, he would raise a lot of cash and pointed out that the
last time he did that was in January 2000 when he raised 65% of cash and
then redeployed it in March 2003.

(David) EC:  To be precise, Bob's timing model adopted a tactical asset allocation based on the market's close on December 31, 1999.  In his January newsletter he indicated he was raising 60% cash, then later in August he increased it by another 5% so that he was at 65% cash.  And then he made the ill-fated recommendation on October 16, 2000 to invest anywhere from 20-50% of those cash reserves into the Nasdaq-100 (QQQ) shares for a counter-trend rally that never materialized and blew up when the QQQs cratered.  But since they weren't included in his Model Portfolio results, his performance returns did not suffer.

Brinker continued:  Bob said the problem with using inverse ETFs is
two-fold. For starters, the inverse ETFs have high expense ratios, and don¹t
always correlate to the index they track.  On any given day, an inverse ETF
seems to correlate well with the index that it is tracking, but over time
that doesn't hold true.  That's one problem with them.  Bob said he is not a
big fan of them and said the way he handles a sell signal in his newsletter
is to sell the stocks and raise cash reserves.  It is not about what you are
making on that cash. You could use a combination of things like money
markets or bond funds depending on your outlook.  The objective, however,
when you think a bear market is coming is to preserve capital.  It is not
about trying to make money on an inverse fund.  Bob said anyone who raised
cash in January 2000 and then reentered the market in March 2003 when the
market was back to its low on the successful retest was happy, regardless of
how much they were making on their cash.

Honey EC: If I failed to point out that Brinker had to go back TWELVE YEARS to find a time when he actually raised cash, my readers would think I'm sick. :)   To do that,  Brinker had to ignore the 500 pound elephant in the room -- namely, the worst bear market since the great depression (2008-early 2009), which his timing model missed completely. He raised no cash for that grizzly bear that slaughtered the market only three+ years ago.

At the beginning of the second hour of the program Brinker talked extensively about  California city bankruptcies.  San Bernardino has now filed municipal bankruptcy after disclosing a $45 million dollar shortfall. This is the third California city to seek bankruptcy court protection since June 28th.

Brinker said: "Why are these cities declaring bankruptcy? Vallejo, Stockton, Mammoth Lakes, San Bernardino. Who knows what other cities could fall. There are rumors about pension liabilities on the upswing in places like Inglewood, Fairfield and Pomona and Stockton and Compton.....rose 6% to $4.3 billion in the year ending June 2010. So there's no question that there are strains to try to get the money together for these various payments that were agreed upon in the very one-sided negotiations between the public sector unions and the taxpayer representatives. The way I envision the taxpayer representatives are empty suits."

David Korn's comments about Bob Brinker's discussion of California's financial distress: 

Brinker Comment:  In San Bernardino they reduced the workforce by 20% over the last four years and they even negotiated labor cuts of $10 million a year, but they still had to file for bankruptcy.  It¹s the high cost of the city contracts that is killing these budgets. There is no question that there are other cities that are strapped for cash to come up with payments for public sector pensions.  Bob said when the well-prepared public sector union negotiators bargained with the taxpayer representatives, the latter Bob characterized as a bunch of empty suits which is why these cities are going broke.  Pension liabilities are on the rise.  Bob noted that pension liabilities in the California cities of Fairfield, Inglewood, Pomona, San Bernardino, Stockton and Vallejo rose 6% for the year ending June 30, 2010 from the prior year.  In Fairfield, California which is near Napa Valley in Northern California, 18% of the general fund is already going to city worker's pension funds, up from 14% from a few years ago.

(David) EC:  As you can imagine, there are plenty of people who are not happy about the bankruptcy.  A woman who derives her income from her husband's San Bernardino police union pension is one of them.  

Brinker Comment:  Stockton, California which has 292,000 residents is the
largest city that has filed bankruptcy.  Bob said he read news reports that
the Stockton police chief who left his job after serving 8 months at age 52
gets an annual pension of $204,000.  That¹s the third out of four chiefs who
occupied that position after serving less than 4 years and they get six
figure pensions.  Is it any wonder that the city had to file for bankruptcy?
  
SANTA CLARA

Caller:  This caller noted that Moody¹s downgraded $143 million in lease
revenue bonds backed by Santa Clara County.  The caller pointed out that the
county¹s redevelopment agency decided to keep the $30 million that was
supposed to go to the San Francisco 49rs new stadium complex.  In response,
the stadium authority is suing to try and force them to provide the funds.
Bob said he doesn't think the taxpayers should be placed into a position of
de facto subsidizing professional sport franchises.  Having said that,
according to Moody's, their downgrade of Santa Clara from an AA1 to an AA2
had to do with other issues.

According to Moody's, the downgrades reflect the county's "significantly
weakened financial position, following three consecutive years of general
fund deficits (2009-2011), and the limited prospects for rebuilding the
county's balance sheet in the current economic environment." Bob couldn¹t
understand why Santa Clara would be willing to provide any money to
subsidize a professional sports franchise.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2012

Honey here: You can get  free issues of David Korn's weekly newsletter and The Retirement Advisor published by David and Kirk Lindstrom HERE.  If you are looking for fixed income advice, I recommend the Retirement Advisor over Brinker (Jr) Fixed Income Advisor. Try them both and see if you agree (I get no commissions on either).

Jeffchristie's Final Exam Question for this week: 

Bob Brinker was critical of what current member of congress, who told Ben Bernanke to "Get to work".

A.  Maxine muddy Watters.

B,  Barney saber tooth Frank.

C.  Chuck the schmuck Schumer.

D.  Dirty Harry Reid.

The answer is in this summary, but if you can't find it or can't guess, here's the video answer:
Senator tells Bernanke "Get to work"

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