March 29, 2008: Article by Bob Norton.  ECs (Editor's Comments): by Kirk Lindstrom

Bob Brinker LT Shadow Stock Market Timing Model Update for March 29, 2008

Evergreen Investments has again lowered their earnings estimate for  2008 from $90 to $85.....with fair value now estimated to lie in the area of 1445.   The Standard & Poors Investment Policy Committee is maintaining their price target of 1560 on an earnings estimate just above $96. This works out to a p/e of 16.25.

Averaging the 2 perspectives would give a median earnings estimate of about $90.50.  Using a p/e of 16.5 would give an S&P upside target range of about 1493.   

Evergreen still anticipates a rebound later in the year due to aggressive Federal Reserve easing and the short term boost from Washington's economic stimulus package.

Dividing the current S&P level of 1315 by my median earnings estimate of $90.50 gives us a current market p/e of 14.53.

The S&P earnings yield (1/14.53 = 6.88%) continues to compare favorably to the present yield on the 10 year Treasury (3.47%).

Investor's Intelligence (Bulls/Bulls + Bears) has now been under .500 for the last three weeks.  This level of bearishness in the Survey has not been seen in years.

Right now, the bull/bear divergence is the strongest I have seen in a LONG time.  The S&P around the end of June 2006 was at 1270, and a significant divergence appeared in the Survey. By Jan 2007 we were up to 1430 and 1550 by July 2007.

Then the market pulled back sharply to the 1406 area by Aug 15th. AGAIN, the Survey developed a wide divergence. What happened next?  Well, we proceeded to march up to 1565 on October 9th.  If these two previous events are any indication, then I believe that we are on the verge of a substantial move upward over the course of the next 9 months or so.

In their quarter-end insight, Morningstar has declared that equity valuations currently are as attractive as they were in October 2002.  We all know that the March 2003 retest of the October 2002 lows served as Bob Brinker's launching pad for his return to a fully invested position.

Monetary Policy:

This indicator is NEUTRAL

EC: Bob N. has the Monetary Indicator as neutral in recognition that the Fed is trying to improve the situation.  Last month I had it as bearish because cutting rates seemed to only be stimulating more inflation while long term rates people get for mortgages were not coming down. The Fed was willing to accept this for now because they feel it is easier to cut inflation later by raising rates than it is to save an economy that falls into a deflationary depression which we could get if all the banks were to stop lending money.

Currently monetary growth is tight but mortgage rates have started to come down.  This is a move in the right direction.

See:  Best Mortgage Rates for the current update of National Overnight Averages of mortgage rates.  For this week the average 30-year fixed rate mortgage is 5.66%, down from last month's 5.94%..

Also, the 5/1 ARM mortgage usually follows short term Treasuries and the LIBOR Rates, but they too remain high at 5.81%, up from 5.17% last month!

Inflation needs to come down for long rates to drop.  Lowering the Fed Funds rate is inflationary so lenders will want assurances inflation is contained before they will accept lower rates.

I'd like to see easier credit, especially the 5/1 ARM and 30 year fixed jumbo rates come down rather than continue to go higher.

The bear market in housing has been made worse by a meltdown in the credit markets so I currently have the "Monetary Policy Indicator" as BEARISH.   

I tend to side with those investors who believe that we will, by the narrowest of margins, avoid a recession in 2008.  My sources hold guarded optimism for the 2nd half of the year.  From Evergreen Investments:

1. Significant private equity money and various Sovereign wealth funds are sitting on piles of cash which will be put to work in our present still-friendly regulatory environment.
2. Technical support levels around the January 22nd low are building a scenario in which "bottom-feeders" will be moving back into the market and will provide support for a sustained advance from these very oversold levels.
3. Similar to the position taken by the S&P Investment Policy Committee,They believe that the combination of Fed easing, fiscal legislation, the arrival of the bottom feeders will support equities in the months and quarters ahead.

Briefing.com maintains that the strength of our exports will prevent the economy from entering a recession.  The article was written on March 19th and I believe they make a good case for a recession near-miss.

EC:  In addition to ECRI, I give a lot of weight to  UCLA's Anderson School of Business and ISI Group's chairman, Ed Hyman. ECRI has called for a recession.  Ed Hyman continues to win awards for the top economist in the US.   Ed Hyman said on on Jan. 14th, "We don't expect a recession, but we do expect slow growth and higher unemployment."

ECRI now says a recession is unavoidable and we may already be in one.  They say it may be shallow and somewhat hedge by saying it might not meet the standard definition of two quarters of negative GDP growth.  See their latest article:

• Friday, March 28, 2008:  ECRI Calls it "A Recession of Choice"

Obviously, Brinker was wrong last year when he said there would not be a recession and predicted the stock market was a buy in the mid 1400s.  The timing model requires "accurate predictions of the future" which is why so many (including me) say market timing can't be done reliably over and over.  This indicator should have been bearish last Summer and Fall to correctly predict the collapse of the housing market, the collapse of major investment banks, a terrified Fed cutting rates like crazy to try and prevent deflation AND conservative Republicans agreeing to throw money at tax payers to stimulate spending.  Brinker did not predict any one of these events which would have had him taking some money off the table if he knew the S&P500 would fall 20.2% so far on an intraday basis.

Below is a quote from Headlinecharts.blog.com (Saturday March 15th)

"You have to respect market timers like Bob Brinker who have devised a market timing model and stick with it when things get rough.  Bob Brinker may not always be right, but if you've ever listened to his radio program you know it isn't because he lacks understanding or experience in the markets.  To be clear, Brinker's timing model is geared to ride out the intermediate ups and downs and remain invested along the primary trends.  He got investors out in late 2000 and then back in March-2003.  He has had his listeners and readers fully invested since March 2003."

Well.....you just read it!  Brinker's timing model is geared to to ride out "intermediate term ups and downs".  Peak to trough the S&P has closed as much as 18.7% off the October 9th high.  Pretty darn close to Bear territory!  I bet many of his subscribers who pay $185 per year would have liked more intermediate term guidance last Summer. Still, the Brinker timing model has not breached 20% on a closing basis and therefore remains intact. 

So what do I think? If we do enter a recession of serious magnitude, then all bets are off on the prospect for a market recovery.....I do not think this scenario is likely. Or, if the future inflation projections mentioned above prove to be inaccurate, then the market advance predicted for the 2nd half of the year could be relatively short-lived.

That aside, I see the market advancing over the next nine to twelve months to a level near 1475, at minimum.  This outlook may be subject to adjustment depending upon how earnings estimates continue to develop.  The key to the future forecast is inflation.  If the slowing economy temporarily dampens inflation pressures, the Federal Reserve will be able to leave the substantial policy accommodation in place.  Assuming we reach the upper 1400s, I believe investors would be wise to make an updated intermediate term risk assessment.....especially if the inflation expectation changes as we enter 2009. Next year in general could be challenging as the boost from all of the stimulus (monetary and Fiscal) begins to wear off. 

EC:  Thanks Bob for another excellent analysis.      

Summary: Bob Norton's "Shadow" Long Term Stock Market Timing Model has  2 indicators bullish and 2 neutral. Last month he had 2 indicators bullish and 2 neutral.

I too look forward to comments others have.  Personally, I think the whole exercise proves why market timing over the long term to add value is nearly impossible.  I like to do it as the sentiment part helps me take profits when the markets are high and buy when others are scared and the market is down but that is more rebalancing than anything else.

For most of the 1990s Brinker said if he saw a bear market coming that he would go to 100% cash or even net short the market.  He went so far as to tell his subscribers to get information from a mutual fund that shorts the market so they are ready to buy should he recommend that fund.  I have to question the validity of a timing model that with all its improvements "only" went to 65% cash just before the worst bear market since the great depression and then allowed as much as half what was taken out to be placed into QQQQ just before it collapsed from $87 to 19 in the next two years.

BTW, if anyone wants to see what my monthly newsletter sentiment update looks like, then check out this PDF file: "Take Profits & Sell Sentiment Indicators from The Market Top." The page of my newsletter is from last year with the markets near an all time high at 1540.

The S&P500 was at 1540 when I said take profits in my monthly newsletter shortly after we had all five of the indicators say BUY on a correction.

Unlike on October 19, 2007, I am NOT saying to sell or take profits now!!!

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