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Bob Brinker Shadow Stock Market Timing Model Update 12/29/07 A Special Report by Bob Norton for the Bob Brinker Fan Club | Highest CD Rates |
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December 29, 2007: Article by Bob Norton. ECs (Editor's Comments): by Kirk Lindstrom Bob Brinker LT Shadow Stock Market Timing Model Update for Dec. 29, 2007 The "Bob Brinker Shadow Long Term Stock Market Timing Model" remains in favorable territory as we move into the month of January 2008. Valuation: S&P earnings projected for 2008 as of 12/17/07 = 101.68 As of 12/28/07 with S&P at 1478. the p/e ratio is 1478 / 101.68 = 14.53 Although earnings projections are continuing to slide downward, the change has been minimal and the 2008 outlook remains positive. EC: The S&P500 closed Friday 12/28/07 at 1,478.49. (S&P500 and other Charts)
If you apply today's PE of S&P IPC Committee's 2008 target of 1650 gives a p/e of 16.22. Evergreen Investments 2008 98.50 x 16.5 = 1625. Morningstar Valuation Graph = still in deeply undervalued territory. The NYSE 30 Day Advance/Decline Oscillator and the NYSE New High/New Low Ratio (Marketgauge.com) are still giving a bullish reading. 10 year Treasury is presently at 4.10% (06/07 = 5.25%) 10 year 4.10% divided by inverse S&P p/e (1/14.53) = yields 0.596 Evergreen Investments is encouraged by this indicator and feels that equities represent a good value going into 2008. EC:
This indicator is often called the "Fed Model" which compares the
earnings yield (one over the price to earnings ratio) of the S&P500
with the 10 year Treasury. For example, 1/14.53x100% is
6.7%, nearly 60% above the yield on the 10-year treasury.
Many think the market is over valued when the indicator is at or above
1.0 so lower is better.
Valuation, at this point, is a key reason as to why the probability of a bear market in 2008 is low. Good valuation outweighs concerns steming from both the difficulties in the housing market and the credit crunch. In fact, when factoring out the impact of writedowns and overall depressed earnings in financials, the earnings prospects for the other S&P component industries look brighter. This indicator is BULLISH. EC: The S&P500
closed Friday 12/28/07 at 1,478.49. S&P estimates (as of
12/27) operating earnings for 2007 and 2008 will come in at 87.51 and
101.23, respectively. The current PE is then 1,478.49 / 87.51 or 16.7
If you apply today's PE of 16.7 to 2008 earnings, we get an estimate for 2008 of 16.7 x $101.23 = $1,690 for the S&P500, 14.3% higher than Friday's close. I cover this in more detail every month in "Kirk's Investment Newsletter." | ||
| Monetary: 12/17/07 M2 liquidity: 7456/6997 = 6.56% - 4.30% (CPI) = 2.26 inflation adj growth rate. M2 rate of expansion is still ahead of 2008 GDP forecasts of 2.0% (Evergreen Investments) and 1.7% (Northern Trust).
Evergreen Investments hopes the Federal Reserve does not take the Federal Funds rate much below 4.0%. They state that Policy makers are rightfully concerned about being aggressive enough to get the economy through the credit crisis. But, Evergreen does not want to see the Fed stray too far from maintaining their "inflation fighting credentials". The Fed, after restoring order in the credit markets, may have to move quickly in the other direction to battle any potential inflation outbreak. EC:
Bob Brinker tracks the growth and inflation adjusted growth of
M2. He likes to see M2 growting better than the rate of inflation
for higher stock market prices. Too much monetary growth leads to
inflation so the FOMC has to walk a tight rope to get this "just right."
In spite of Core PCE elevation, I am leaving this indicator as BULLISH for the time being.Sentiment: Investor's Intelligence Survey (bulls/bulls+bears) 12/24/07 stands at .703. The survey has once again reached into Bob Brinker's caution zone for the second consecutive week. If the 4 week average stays below .70, then this may just be a temporary spike. EC: The
60 day moving averate of the Put/Call ratio was under 0.50 in early
2000 when Bob Brinker's timing model signaled sentiment was too
bullish. A reading of 0.50 or less means two bullish call options were
bought for every bearish put option.
EC: More Sentiment Indicators This indicator is still BULLISH. Economic: 11/30/07 3rd qtr GDP revision = 4.9% Average GDP growth = 3.3% for the first 3 quarters. My various sources hold to the consensus that we will likely avoid a recession in 2008, but that GDP growth will continue to weaken. Northern Trust suggests that a 2008 recession may be close to unavoidable. 2008 GDP forecast has been reduced to 1.7 from 2.0%. On December 21st, they predicted that first quarter GDP may be lucky to register 0.5%. Northern Trust stated that falling into negative territory in the 1st quarter could be a matter of just a rounding error. They presently rate recession possibility in 2008 at 65%. Evergreen Investments is anticipating 2007 4th quarter GDP to "barely expand within the range of 1%. However, they feel that the low unemployment rate and solid income growth, among other factors,will supply enough of an offset to the mortgage-related weakness so that GDP expansion in 2008 should be in the range of 2.0% for the full year. ECRI Forecasting (Lakshman Achuthan) maintains that, for the present time, a slow growth economy still wins out over a recession call as we begin 2008. This indicator is now NEUTRAL. Summary Comments: The "Shadow" Long Term Stock Market Timing Model now has 3 bullish indicators and one neutral. The Federal Reserve is now engaged in a tricky balancing act because lowering rates to ease the credit issues could provide more fuel for an inflation outbreak down the road. According to Northern Trust, the Fed appears to be more focused on ensuring that the credit markets are functioning normally and preventing a severe economic downturn. They feel that the Federal Reserve has enough time to address the inflation issue once the credit crisis ends. Northern Trust feels that the Federal Reserve needs to get the Fed Funds rate down to 3 1/2 % by mid 2008 in order to dodge a potential recession. In last month's edition I raised the possibility of the economy heading toward stagflation. In an interview with "60 Minutes" on Sunday December 16th, former Fed chairman Alan Greenspan mentioned that very point. As we move into the first quarter of 2008, the ability of the U.S. Economy to navigate through the economic minefield could materially affect the prospects for stock market gains. With one trading day left to go in 2007, the S&P is only up 4.2% YTD. If we end around 1480, we would need an 8 to 9% rise in the S&P to reach the predicted levels indicated by Bob Brinker and others. It will be interesting to see if these targets are lowered as we head into the new year. Bullish....yes...but keep in mind that the Vanguard Prime MM has yielded over 4.5% this year. Can you spell "Risk Aversion"? Your comments are always welcomed and appreciated. Bob Norton If you want updates on what Brinker is saying on Moneytalk delivered to your email box, often within 24 hours after Sunday's show, then send us a note at TalkAboutMoney@gmail.com and ask to get on our mailing list.
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