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Saturday, December 01, 2007

Bob Brinker's LTSM Timing Model Update for December 2007

The Bob Brinker Shadow Long Term Stock Market Timing Model remains in favorable territory as we move into the month of December.

Article by Bob Norton, posted Saturday Morning on the Bob Brinker Discussion Forum at Facebook's Investing for the long term group.

ECs (Editor's Comments): by Kirk Lindstrom

Valuation:

Market close 11/30/07 S&P 1481

S&P earnings projection for 2008 is 102.86 as of 11/28/07.
p/e based upon S&P 1481/102.86 = 14.39

S&P Investment Policy Committee's most recent 2008 price target of 1650 presently yields a p/e of 16.04.

I anticipate that the S&P IPC may lower their forecast between now and the end of the year. On 11/26/07, one of my valued sources from which to make comparisons with Bob Brinker, Evergreen Investments, have lowered their 2008 guidance of S&P earnings from $100 x 17 =1725 down to $98.50 x 16.5 = 1625.

The Morningstar Valuation Graph has the market in deeply undervalued territory.

The NYSE 30 Day Advance/Decline Oscillator and the NYSE New High/New Low Ratio (Marketgauge.com) both indicate extreme oversold conditions.
  • EC: This chart shows the number of NYSE stocks that are making new 52 week lows (red spikes) plotted with the S&P500 in black. You can see from the chart that spikes above 450 new lows are fairly rare. On Nov. 9, 2007, the NYSE made a second spike above 450 in just a few months!

Yesterday the 10 year Treasury closed at 3.97%, falling further away from the June 2007 level of 5.25%. Downward pressure on yield is a result of the flight to quality coming from the sub-prime mess, along with as-of-yet unsubstantiated recession fears.

The ratio of the 10 year 3.97% divided by the inverse of the S&P p/e (1/14.39) yeilds .572..... confirming that the market is substantially undervalued. In the December 3rd edition of Barrons, Don Hays of Hays Advisory Group said that this is an excellent indicator in that it shows that "money goes where it is treated best"

This indicator is BULLISH.

Monetary:

As of November 12th, M2 liquidity came in at 7403/6945 (year ago) =
6.59% increase minus 3.50% (headline inflation) = 3.09 inflation adjusted increase. M2 expansion is slipping against the projected 2007 GDP growth rate, but is still marginally ahead of 2008 consensus forecasts of 2.0 - 2.5% (Northern Trust, however, lowered its estimate to 1.7% earlier this month).

M2 growth trend needs to be monitored closely going forward, especially considering the Federal Reserve's task of balancing duel concerns over the housing-related slowdown with the recent uptick in headline inflation.

Headline inflation has jumped from 2.8 to 3.5%. Core CPI is slightly above the Federal Reserve comfort zone at 2.2%.

The PCE has risen to 2.9 from 2.4%, with the all-important Core PCE now standing at 1.9%.....still withion the 1-2% Federal Reserve comfort zone.

For the time being, core PCE is well behaved.

This indicator is BULLISH

Sentiment:

AAII bullish readings have fallen to 28.6 (12/2/07) from the 11/2/07 reading of 44.7

Investor's Intelligence Survey (bulls/bulls +bears) 11/20/07 from Market Harmonics stands at .643. This provides continued relief from the worrisome readings of over .70 which were consistent throughout the month of October.

A recent reading of the moving average of the 60 day put/call ratio stood at .999... still showing sufficient negativity in the investment community.

  • 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.
  • chart: something wrong clicking the chart so I will upload it here later.

The ARMS Index of declining versus advancing NYSE issues has showed continuing improvement from the highly elevated readings of November 12th. Further improvement back toward a neutral stance is desired.

This indicator is BULLISH

Economic:

The November 30th 3rd quarter GDP revision of 4.9% yields an average GDP growth rate of 3.3% for the first 3 quarters. Still, there is widespread concern regarding the potential for a serious slowdown in the 4th quarter.

ECRI Forcasting (Lakshman Achuthan) noted on 11/30/07 that deterioration in their indicators continues, but that they still fall short of a recession call.

Paul Kasriel is the director of economic research at The Northern Trust. They publish an excellent monthly report entitled "U.S. Economic and Interest Rate Outllook". Northern Trust has also been reluctant to make a recession call thus far, but their work suggests that a 2008 recession may be close to unavoidable. Their 2008 GDP forecast has been reduced to 1.7 from 2.0%. They make the case that the Federal Reserve needs to get short rates down to the area of 3- 3 1/2 % by mid 2008. But they also state that the Fed's hands may be tied by less than cooperative future inflation data. This report is definitely worth reading.

For the present time, a slow growth economy still wins out over recession as we begin 2008.

This indicator is BULLISH, but may be deteriorating toward a neutral stance. Federal Reserve policy announced at the upcoming December 11th meeting and incoming data during this month will play an important role in clarifying the direction of this indicator going forward.

Summary comments:

All four indicators are bullish, but with the economic indicator under some pressure. The immediate outlook for inflation still looks benign, even with the elevation in the headline number.

The falling dollar is viewed by many as making U.S. exports attractive to foreign purchasers and may provide a partial offset to future lower domestic spending caused by the "taxing effect" of higher energy prices. If higher energy prices do begin to leak into the core PCE, as I speculated about last month, then we may need to start discussing the possibility that a watered-down version of stagflation may set in.....but certainly nothing like what happened back in the 1970s.

As we close out 2007, the October 9th S&P high of 1565 was less than 1% (high or low) from the predictions made by Bob Brinker, the S&P Investment Policy Committee, and other sources which I monitor. It will be interesting to see how right they are next year!

That's it for now. As always, your insight and comments are welcomed and greatly appreciated!
Bob Norton
(more Posts by Bob Norton.)



EC: Great work Bob! Thanks.



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