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Bob Brinker Shadow Stock Market Timing Model Update 06/25/08 A Special Report by Bob Norton for the Bob Brinker Fan Club | Highest CD Rates |
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June 25, 2008: Article by Bob Norton. ECs (Editor's Comments): by Kirk Lindstrom Original Text: Post # 1468 on 6/21/08 at our Bob Brinker FREE Discussion Forum on Facebook. Bob Brinker LT Shadow Stock Market Timing Model Update for June 21, 2008 The
"Bob Brinker Shadow Long Term Stock Market Timing Model" remains in
favorable territory as we move into July, 2008. Valuation: On June 4th, the S&P
Investment Policy Committee reduced their upside target from 1560 to
1490. That is now pretty much in line with the forecast Evergreen
Investments has stuck with in recent months. Evergreen has maintained
an S&P fair value market level in the 1450s.
As of 6/16/08, S&P further reduced their earnings projection to $89.03. Averaging Evergreen ($85) and the current S&P guidance ($89.03) yields $87.15. Dividing current S&P level of 1317 by my median earnings estimate of $87.15 gives us a current market p/e of 15.11. Using Bob Brinker's p/e multiple of 16 to 17 times earnings, fair value comes in between 1394 to 1481.....a long way from Bob Brinker's prediction of new highs in the S&P as we move into 2009!!! EC: Most analysts, including Bob Brinker and myself, grossly over estimated the competence of management at the major investment banks. We were totally blindsided by the billions of dollars in write-downs they are taking for holding toxic, subprime loans. I knew the loans were bad, but I thought the investment banks were smart enough to sell them to foreigners and less sophisticated investors seeking yield who had no appreciation for risk. Earnings estimates will turn up again when the investment banks finish their write-offs of bad loans and the associated costs of firing staff to regain profitability. The S&P earnings yield (1/15.11 = 6.61%) continues to compare favorably to the yield on the 10 year Treasury (4.14%). 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."
This indicator remains 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. | ||
| Sentiment: Investor's
Intelligence (Bulls/Bulls + Bears) has pulled back sharply to .492,
after having spent the month of May in the range of .540 to .606! The
rise in pessimism is is expected, given the fact that the S&P is
off the May 19th high of 1426 by 109 points!
Bob Brinker's favored 60 day put/call ratio is only standing at .99, I would expect this to improve in the near term as the 10 day have moved back to the area of 1.027 after having been as low as .88 back on May 14th 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 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.
Monetary Policy: The next FOMC meeting is June
24-25. The Federal Reserve membership has pretty much signaled that no
change in the federal funds rate will come out of this meeting.
Headline CPI made a significant jump to 4.2%. However, core CPI moved back a notch to 2.3%, from the previous 2.4% EC: Despite Bob Brinker's protestations to the contrary, the Federal Reserve considers core inflation above their 1.0 to 2.0% "target" high. See "Bob Brinker & Ben Bernanke On High Inflation" for Bernanke's answer to congress:
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, due to fears of inflation, mortgage rates are still high, if you can get them. I know people who had home equity loans for home improvement projects cancelled because their equity in their home shrank or vanished!
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. The consensus opinion of my sources is that the road to economic recovery my be longer than first anticipated. The unwinding of the overall credit crisis is continuing to rattle the stock market. Still, there are a few encouraging signs for stock market improvement moving into 2009. Inflation is still expected to moderate as unemployment creeps higher and compensation costs are expected to moderate. The data I have looked at suggest that there is little likelihood that labor costs will put upward pressure on inflation. Economic growth is expected to remain sluggish for several quarters to come. GDP growth to may be no better than 1% in the 2nd quarter. My sources continue to believe that inflation will moderate later in 2008 as energy prices fall back and consumer spending moderates. Evergreen Investments made a cautious statement on the better than expected GDP numbers: "While better than expected (and certainly better than recession!), it is important to note that much of the GDP strength came in the form of exports and government spending. We consider these as supports, but not catalysts, for output. We view the catalysts for sustainable growth to be consumption, housing and capital expenditures. 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: The
Federal Reserve members, in spite of their public hand-wringing over
inflation, are probably relieved in that the core numbers are not too
much out of their comfort zone. Of course, those of us who eat
groceries and drive a car to work may feel differently. Still, imagine
the prospects for stock market improvement if the fed WaS RAISING
interest rates!
My intermediate term outlook for the market is unchanged. Six to nine months out we have a chance to break out of this sideways market and see the S&P pushing 1500 or a bit higher. Higher than 1500 would be considered to be slightly over-valued. But then again,over-valued markets do happen.....and would present the opportunity for performing an individual market risk assessment. Bob Brinker's expectation for prices north of 1600 in 2009 seems a bit unrealistic at this point. But if the S&P continues to move toward another test of the March lows, we could really see levels of fear which would be a fantastic contrary indicator! As long as the core inflation numbers do not accelerate, forcing the Federal Reserve into a rate raising campaign rates, then I will remain optimistic. But if rates go against us.....can you say "free-Fall"? 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. (See Bob Brinker's QQQ Advice) 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. 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.
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