One potential flaw in Bob Brinker's Long Term Stock Market Timing Model is he looks at operating earnings which ignores the write-offs. Many companies use write-offs as part of their business model. That is they make a ton of money in the good years then in the bad years they lay off staff and get out of marginal businesses and "write off the costs" to lay people off and exit business.
Each month in "Kirk Lindstrom's Investment Newsletter" I update the page I call "Fed Model Update." The “Fed Model” refers to a simple model the Federal Reserve uses which compares the earnings yield of the S&P500 with the 10-year Treasury bond. The model says the stock market is over valued if the earnings yield (defined as the total earnings of the S&P500 divided by its price) is lower than the yield of 10-year Treasury bonds, currently yielding 3.77%.
Below is my comparision for this month. Note how the year-0ver-year estimate for operating earnings growh is a whopping 18%.
2007 Operating EPS (bottom up est.) = $84.13
Year over Year Dollar Growth = -$3.59
Year over Year Percent Growth = -4.1%
PE Ratio = 16.0
Earnings Yield 6.2%
2008 Operating EPS (bottom up) = $99.50
Year over Year Dollar Growth = $15.37
Year over Year Percent Growth = 18.3%
PE Ratio = 13.6
Earnings Yield 7.4%
2007 GAAP EPS = $71.56
Year over Year Dollar Growth = -$9.95
Year over Year Percent Growth = -12.2%
PE Ratio = 18.9
Earnings Yield 5.3%
2008 As reported GAAP EPS = $71.20
Year over Year Dollar Growth = -$0.36
Year over Year Percent Growth = -0.5%
PE Ratio = 19.0
Earnings Yield 5.3%
Fearful investors won't get too excited about the market until it starts to look past the write-offs that have crushed GAAP earnings.
This chart shows TTM (trailing twelve month) GAAP earnings.
The bad news bears think the decline in earings is only starting while bulls like Bob Brinker believe we are having a temporary downturn in earings like we saw in early 2003 before we resume earings growth.
GAAP stands for “Generally Accepted Accounting Principles”