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 Bob Brinker Shadow Stock Market Timing Model Update 05/01/08
A Special Report by Bob Norton for the Bob Brinker Fan Club

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May 1, 2008: Article by Bob Norton.  ECs (Editor's Comments): by Kirk Lindstrom

Bob Brinker LT Shadow Stock Market Timing Model Update for May 1, 2008

The "Bob Brinker Shadow Long Term Stock Market Timing Model" remains in favorable territory as we move into May, 2008.


Averaging Evergreen ($85) and S&P guidance as of 4/28/08 ($91.69) gives $88.34.

Dividing current S&P level of 1385 by my median earnings estimate of $88.34 gives us a current market p/e of 15.67.

The S&P earnings yield (1/15.67  = 6.38%) continues to compare favorably to the yield on the 10 year Treasury (3.76%).

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.  Proponents of "The Fed Model" think the market is over valued when the indicator is at or above 1.0 so lower is better.  I cover this in more detail every month in "Kirk's Investment Newsletter."

The S&P Investment Policy Committee has recently concluded that we have likely seen the worst of the equity price declines.

This indicator is  BULLISH.

EC: I agree with Bob N. that valuation is quite bullish as long as a deeper than predicted recession (or economic slowdown) doesn't cause analysts to lower earnings estimates for 2008 and 2009 over and over.


Investor's Intelligence (Bulls/Bulls + Bears) has risen above the .500 for the first time in eight weeks.....present level is still a very pessimistic .523.  The Morningstar Valuation Graph has been bouncing around the deeply under-valued level since the middle of January. 

EC: II-BBS:  Investors’ Intelligence Bull Bear survey:  II Charts and Info
       AAII: American Association of Individual Investors Bull/Bear Index: Charts and More Info

The put/call ratios are indicative of a high level of bearishness with the 10 day at .99 and Bob Brinker's favored 60 day at 1.08, as of last Friday.  Lots of bearishness for contrarians to feast upon!

EC:   This sentiment page from my newsletter is from last year (10/19/07) with the markets near an all time high at 1540.  The sentiment indicators then were all saying take profits or sell.  You can clearly see how the 10 day moving average of the put/call ratio had plunged to "support levels" that indicated a major panic had dissipated as investors were getting bullish again.  This was also supported by the II Bull over Bulls plus bears Chart.

EC: The 60 day moving average 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.

EC: I agree with Bob Norton and Bob Brinker that the "long term" sentiment readings are bullish.  You will have to subscribe to my newsletter to see my "shorter term" sentiment indicators are saying.  These shorter term indicators had me buy $10,000 of SPY for my newsletter explore portfolio at $130.61 in March 2008.  This would be about 1306 for the S&P500.  As I type, SPY is $141.11 and I currently hold the position. 

Monetary Policy:

This month's release of the headline CPI remains at 4.0%.  Core CPI has bumped up slightly to 2.4% from the previously recorded 2.3%.

Despite Bob Brinker's protestations to the contrary, the Federal Reserve considers core inflation above their 1.0 to 2.0% "target" high.   With the economy heading or in a recession, the Fed is more concerned at avoiding a Japanese style recession where we see major deflation.  Like in Japan after their markets peaked in 1990, we have already seen deflation in housing markets except for the very best high end properties.  The Fed will do all it can to prevent deflation now and deal with any inflation by raising rates if needed later.

See "Bob Brinker & Ben Bernanke On High Inflation" for Bernanke's answer to congress: 
  • "Of course, we are concerned about inflation. Inflation has been too high. Over the last year, it has been about three and a half percent instead of a little over two percent in the previous year. The primary reason for the high inflation is rapidly increases in prices of globally traded commodities including crude oil and food, among others.

The latest M2 money supply data shows 7665/7212 = 6.28% - 4.0% (CPI) = 2.28% inflation adj growth rate. M2 growth continues to be restricted by overall conditons in the credit markets.  At the April 30th Federal Reserve  meeting, short term rates were further reduced by 1/4 of a percentage point.  Still, it appears that we have longer to wait for Federal Reserve policy to have a significant impact on economic growth. 

www.Treasury.Gov continues to show yield curve slope looking positive as we look at progressively longer maturities. Although the improvement in the yield curve is welcomed, I prefer to leave this indicator as

EC: Bob Brinker tracks the growth and inflation adjusted growth of M2.  He likes to see M2 growing 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."

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 but reports say it is hard to get loans even if you have great credit.
  • See:  Best Mortgage Rates for the current update of National Overnight Averages of mortgage rates.
  • LIBOR Rates are down but the 1-yr jumped from 2.39 to 3.07% last month!  This won't make it easier to get loans and will make the reset rate for AMRs higher so those in homes who can afford to say will have less money after making higher mortgage payments.
EC continues: 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.   The Fed lowered rates yesterday to 2.25%.  We need to see signs the economy is bottoming and even turning up so the Fed can talk about raising rates to satisfy the inflation hawks so the long rates can come down and people can get affordable home loans.  We are seeing progress, but not enough for me to put it at neutral.

Remember 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.   

If this does not change from Bearish to Neutral and the market continues to rally, than I expect I will go into profit taking mode before we see new all time highs again.  This is far different than Bob Brinker who was fully invested at the top and prefers to ride these corrections or bear markets up and down fully invested.


Serious slowdown/recession.....call it whatever suits you.  Mr Market has already acknowledged that we have arrived. Evergreen Investments has altered their stance in that we will we will probably NOT avoid slipping into recession territory.  Evergreen, however, does maintain that the massive stimulus injection will take hold in the 2nd half of the year and into early 2009.  This stance is consistent with other sources I have been following.

BUT TAKE NOTE.....Evergreen has concerns about a "double-dip" later in 2009 as the stimulus effects begin to fade.....not to mention my concerns about what happens to the health of the stock market if concensus future inflation projections turn out to be wrong.

From Wachovia Bank:

"The key to whether inflation will remain subdued will depend crucially on how the Fed responds to renewed growth in 2009. A year from now when the economy is beginning to reaccelerate, the underlying rate of inflation probably will still be in the vicinity of 2 percent, near the upper end of the range that the Fed is hoping to achieve over the medium term. Given the long lags between monetary policy actions and their impact on the economy, it will be important for the Fed to begin pushing up the funds rate to a more neutral posture relatively early in the expansion if it is going to succeed in keeping inflation persistently low".

Curiously, March data on industrial production and retail sales would seem to contradict the widely held view that we have entered recession.  Both indicators made a slight rebound from the February readings.  We will have to wait for definitive signs that the slowdown/recession will not morph into anything truly serious.

Today the government released the advance number on 1st quarter GDP and it came in at a POSITIVE 0.6%.  If the eventual adjusted number stays in positive territory, then I may return this indicator to a bullish stance, but for now.....

The economic indicators remain  NEUTRAL.

EC:  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 as it was making new highs.  These days Brinker says there may be a recession and the market is a buy in the low 1300s.  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.

Summary Comments:

We will have to endure 2 quarters of very slow to negative growth before witnessing a return to a positive growth trend. Once the monetary and fiscal stimulus begins to flow through the economic pipeline, it will act as a catalyst for equity recovery into the mid to upper 1400s, at minimum.  Investors could see a breakout beyond this range, but any such extension beyond these limits probably will be short-lived.  Evergreen characterizes this anticipated move to the upside as a relief rally fueled by massive stimulus which may ultimately meet resistance by mid 2009.

On April 4th, Federated Investors called for the S&P to reach the 1550-1600 range this year for a mid to upper single-digit gain on the 12/31/07 close of 1468. In my opinion, this may be a touch too optimistic right now. An S&P recovery near or above 1500 would definitely call for a new stock market risk assessment.   

As stated last month, the outlook is subject to adjustment depending upon how earnings continue to develop.  1st quarter earnings have been reacted to favorably by investors.  Even results for Financials have not been "as bad" as Mr. Market was bracing for.

Will inflation trend forecasts by Wachovia, Wells Fargo and others hold true in the coming months? Will the economic slowdown/recession keeps a lid on the Federal Reserve's favored core inflation rate?  My biggest worry is that oil prices in the $115/barrel range will begin to hit the core inflation numbers and will cause an about-face strategy on the part of the Federal Reserve.

And if that happens.....LOOK OUT BELOW!

Bob Norton

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.

In March I added SPY to my newsletter explore portfolio at
$130.61 and today it closed at $141.11.  I don't know what the short term hold for the market but if we continue higher, then I will again take profits when my indicators and asset allocation tell me to do this.

Subscribe to my newsletter NOW to see what I recommend today!

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.

Please discuss Bob's article on our Bob Brinker Discussion Forum at Facebook's Investing for the long term group.

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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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Bob Brinker in 2000
ABC's Market Timer Bob Brinker helps Moneytalk listeners reach the "Land of Critical Mass."  This is the place for Information about Bob Brinker,  Bob Brinker's Stock Market Timing Model and Marketimer Newsletter.  The photo of Bob Brinker is from a 2000  appearance at a charity event.

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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