September 17-18 2005 Show Report:
EC = David's Editor Comment
Brinker Market Comment: This
Friday, the S&P 500 closed around 1237 and remains very close to
its cyclical bull market high of 1,245 it reached back in August. For
those of you who have tracked along this new secular trend, you know
the first major event was in the first quarter of 2000. We had a
17-1/2 secular bull market that started in 1982 and lasted all the way
until 2000 which produced total returns of close to 1400%. That
secular bull market ended for the Dow on January 14, 2000. The other
indices reached their peaks in March 2000. Following that, we had the
second worst cyclical bear market since the Great Depression which
brought the S&P 500 down 49% to its absolute low. Then cyclical
bear market #1 ended and along came March 11, 2003, when Bob issued his
major cyclical bull market buy signal. Since then, we are approaching
a total rate of return of 60% including dividends. Bob noted that the
Nasdaq has done better than the S&P 500 and Bob noted that he has
included the Nasdaq in his model portfolios.
The market continues to show its resilience. The market has been able
to absorb all of the bad news, not only related to Hurricane Katrina,
but also with respect to oil prices which have been running wild.
EC: No surprise here. Bob remains bullish on the market. If you are
looking to add in new money into stocks, at these price levels Bob has
recommended a dollar cost average approach.
I-Bonds: This
caller is considering buying I-Bonds. Do we have to pay state
income taxes on I-Bonds? Bob said that any security that is
directly issued by the United States Treasury is exempt from state
income tax and because I-Bonds are issued by the treasury, they are
exempt as well. With respect to the federal income tax, you can
defer the interest you receive all the way out until 30 years when you
cash them in. At that point, you would be responsible for the
federal income tax. If you purchase I-Bonds prior to the close of
business on October 31st, you will get an annualized rate of return of
4.8% for the first six months that you own them. After that, the
rate is reset every six months. The current rate consists of a
1.2% base rate and a 3.6% inflation component.
EC: The U.S. Treasury announced that if you live in an area that was
affected by Hurricane Katrina, you may be eligible to cash your savings
bonds within their minimum 12-month holding period, including those
held electronically in TreasuryDirect. This applies to I-Bonds
and EE/E Savings Bonds. Learn more about it here:
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GOVERNMENT SPENDING IN THE WAKE OF KATRINA
Caller: How can our government keep spending and spending with no end in sight? Bob said he thinks we have a lame duck President with three years to go and Bush doesn't care about the consequences of all his spending on future generations. The President has announced that there will be no tax hikes to pay for this spending. Bob added that the Gulf States supported Bush and he is spending money down there like its a tea party. Bob said prepare yourself for the next chapter of this equation which will be waste
and fraud like you have never seen before.
EC: I have already heard reports of fraud based on individuals obtaining money from FEMA who are not really eligible for it.
Brinker Comment: Bob said he doesn't think the government should rebuild New Orleans without making preparations to prevent this from happening again which includes fixing the levee system to sustain a Category 5 hurricane and rebuilding the wet lands of Louisiana.
Caller: This caller said she was unhappy with the "blank check" being written by the government to the Southeast region, especially when many of the people may not be returning to the area. Bob agreed and thought the
government should encourage people to rebuild in a "safe" area that doesn't have the flood risk and exposure that New Orleans has.
Caller: What is the alternative to rebuilding New Orleans? Bob said the alternative is to operate New Orleans as a port. To just put up another city without the wetlands being built and the levees being built up is ridiculous. The residents have already gone to other areas. The government should encourage people to relocate. Bob said he does not understand the mentality that you have to rebuild the "great City of New Orleans."
EC: There is an article about New Orleans that is getting a lot of press this week. It is written by George Friedman and is entitled, "New Orleans: A Geopolitical Prize." I think it is worth reading and I will send it to daBrink in the hope that he reads it so that he can educate himself a little but more about the City of New Orleans both from a historical perspective and its current importance in our country. You can read it for yourself at this url:
http://tinyurl.com/8rgzl
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Caller: This caller pointed out that the government has spent and continues
spending a lot of money in Florida in the aftermath of hurricanes and
queried how it would look if they refused to give the same kind of help to
Louisiana. Bob said he isn't saying the government shouldn't spend zero,
but it doesn't make sense for the government to rebuild New Orleans without
fixing the problem that created the flooding. The caller said it has never
made sense to her why the government keeps spending money in Florida. Bob
said you couldn't compare Florida to the City of New Orleans, but the caller
said money keeps flowing in, even though each year a hurricane ravages
portions of Florida. Bob disagreed and noted that he lived for many years
in Florida and said there are many years where there are no hurricanes at
all. Bob raised his voice and said the spending in Florida is totally
different than the spending in the hurricane ally of the Gulf Coast. Bob
shrilled that they do not have hurricanes every year in Florida!
EC: I have to give the caller the winning argument here, at least in terms
of logic. I have been in the greater New Orleans area for more than 15
years, and this is the first time I have seen any serious damage caused by a
hurricane. I think the caller's point was that the government continues to
spend in Florida without "fixing the problem" which Bob seems to think is an
absolute requirement for New Orleans. News flash to Bob: You can only do
so much to prevent Mother nature from yielding her power. Let's face it,
many parts of our country are at risk of a natural disaster of some sorts,
but that doesn't mean we haven't chosen to build there. Sure, the levees
should be strengthened to sustain a Category 5 hurricane. Nobody would
disagree with that in principle. However, like any economic issue, there is
always a risk/reward factor and when they built the levees to the capacity
they are now, they apparently didn't have the money or capacity to build
them any higher. I think now, there will be political, economic and social
pressure to make the levees capable of sustaining a category 5, (or some
other mechanism to minimize a levee breach).
Brinker Comment: Bob said he is also disturbed by the Governor of
Mississippi for proposing they rebuild the casinos along the Mississippi
coast. Why should they do it when they will inevitably get hit again by a
hurricane?
EC: I read a post on a message board that was along the lines of the
earlier caller. What's the difference between Mississippi and areas of
Florida that got hit by Hurricane Andrew for example? In fact, a caller
from Pensacola called in saying it took 8 months for them to get power
restored after Hurricane Ivan. I don't hear Bob suggesting that they
shouldn't rebuild in Pensacola.
Caller: A caller from Baton Rouge, Louisiana said her city is now wild as
the population has basically doubled. Baton Rouge (the Capital) is now the
largest city in New Orleans and many have obtained jobs there. Bob said
many people have relocated to other states, such as Texas and he thinks many
will decide not to return because the government hasn't come up with any
solutions yet. The caller noted that many people are buying houses now,
even if its only for the short term, just to have a place to live.
Caller: A caller from New Orleans pointed out to Bob that there are many
industrial plants along the Mississippi river and what would Bob propose
about that. Bob said we would have to have living arrangements for people
to service those plants as the port of New Orleans is indispensable;
however, that is different than rebuilding New Orleans. The caller noted
that there are over 300,000 residents that had little to zero flood damage,
and what happens to those people and their property values. Bob said he
doesn't think New Orleans will go back to pre-Katrina and if you are going
back to that area, you have to accept reality that it is different. Bob
said he would fully support the Federal Government getting the port back and
running, but that is entirely different than what the government has
proposed.
EC: I read an interesting article that compared Katrina to the earthquake
that hit Mexico in 1985. You can read it as well at the following url:
http://tinyurl.com/7f2ak
VANGUARD GNMA
Caller: This caller wants to move some cash into the Vanguard GNMA, but
her husband doesn't think the fund will perform as well going forward. Bob
asked why her husband felt that way, but she had no answer. Bob said he
stands by his recommendation of the Vanguard GNMA fund and noted that he has
included it in a diversified fixed-income portfolio for 20 years. Bob
suggested that she tell that to her husband.
EC: The net asset value of the Vanguard GNMA Fund which Bob recommends
(Ticker: VFIIX) closed Friday at $10.34.
HOUSING ISSUES
Caller: This caller is a contractor who has witnessed many individuals
purchasing property, and renting them out at a lower rate than will pay the
mortgage note in the hope that the property value will go up and they can
resell the property at a profit. In addition, the caller noted that he
didn't think the government was reflecting higher property values in the
inflation figures. Bob agreed with both points noting that even on
Moneytalk, he has observed that there is a lot more speculation in the
housing market. With respect to inflation, Bob said that the Consumer Price
Index takes into account a rental equivalency formula, which therefore does
not take fully into account the appreciation of home property. However,
Bob noted that speculation in the housing area is regional -- especially in
water front property.
Caller: This caller said she and her spouse are considering purchasing a
$450,000 lake front property in Tampa and using the equity in their current
home to pay for the second home. Bob said if you are looking at buying
property on the west coast of Florida, you have to keep in mind how much it
will cost to self-insure against storm damage. Bob noted that some storms
along the water have the capacity to not only destroy a house, but
completely decimate the property and wipe it out. Bob noted that federal
flood insurance is capped at $250,000. (Bob said $275,000 but I checked and
it is $250,000). Bob added that she will probably not be able to purchase
private flood insurance since too many insurers have been burned in that
area. That would leave you a gap of $200,000 in coverage if you lost
everything.
EC: The standard homeowners' insurance policy excludes flood coverage which
generally must be bought from the federal government and is capped at
$250,000. Sadly, FEMA estimates that only 40% of the residence in the
flooded areas caused by Katrina were covered by a policy. Most of those
who did were required to have flood insurance in order to get the mortgage.
Are you asking yourself whether you need flood insurance? Here is an
article that answers that question entitled, "Do you need Flood Insurance"
which you can access here:
http://tinyurl.com/bn8ln
Caller: This caller owns several properties in Northern California and has
seen many more properties staying longer on the market for sale. He is
getting nervous and is wondering whether he should sell his properties now.
Bob said the first phase of a weakening housing market, is a proliferation
of "for sale" signs. This tells you that the buyers are not willing to
enter into a purchase agreement at the price levels being offered. The
second phase involves a price reduction of those trying to sell houses as
they compete for buyers. The third phase would be a material decline in
prices. Bob said he couldn't advise the caller on what to do, as we don't
know if this is bump in the road, or a trend. Unless the "for sale" signs
come down, however, Bob would expect to see a decline in price.
EC: If you want to see how much U.S. home prices have increased, a good
source is the Office of Federal Housing Enterprise Oversight (OFHEO) which
tracks home price data using the House Price Index (HPI). The HPI is
published on a quarterly basis and tracks average house price changes in
repeat sales or refinancing of the same set of single-family properties.
Here is a link to an excellent article from FDIC entitled, "U.S. Home
Prices: Does Bust Always Follow Boom?:
http://tinyurl.com/dyxw8
FINAL THOUGHTS FROM DAVID K: I am starting a new
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