Steve Thompson's Bob Brinker Timing Model Update for December 31, 2006

MODEL ANALYSIS for December 31, 2006

VALUATION INDICATOR

I must say I was surprised when in October of this year, Bob revealed his 2007 S&P 500 earnings estimate of $87.75. The figure that Bob is using seemed like a huge leap from his prior 2006 estimate of $82 which was closer to his forecast of $79 that he started the year making. I wonder if Bob's forecast is a little high this time. If we use Bob's $87.75 figure and the present level of 1,418.30, we get a price-to-earnings ratio of just over 16. The FED model used by Ed Yardeni suggests a P/E of 21.23 would be fairly valued. If Bob is right on his earnings estimate and we get some modest multiple expansion, 2007 could easily see new all time highs in the S&P 500 with a P/E of 18! If the long bond rises to 5.55%, the FED model would suggest a P/E of 18 is reasonable. I can see why Bob would be bullish when the foundation of his model at this time is sanguine. I rate this indicator as bullish.

MONETARY POLICY

Bob looks at short term rates and real money supply growth in connection with the Monetary Policy Indicator of his timing model. Last month, Ben Bernanke stated that the money supply has become unreliable as a tool for forecasting inflation and growth. Still, it is a component of Bob's model so let's take a look at where it is now. Real seasonally adjusted growth in M-2 is showing a decent gain of 2.78%. This is due to, in part, the latest CPI number of 2.0%. I had written a few months ago that I felt the next two CPI reports would be noteworthy. My thinking was that the year-over-year comparisons would be easy since they spiked up in the post Katrina/Rita period due to higher energy prices. So now with lower oil costs we are showing minimal CPI increases. Real growth in M-2 is starting to look like it could provide some fuel for a growing economy. I don't see the FED changing short-term rates soon since they worked so hard to normalize them. The Core PCE came in December 22, 2006 at 2.2%. This is down from the previous report of 2.4%. Should future reports come in under 2%, we may be able to start looking for a cut in short-term rates from the FED. I see the monetary indicator as neutral.

ECONOMIC INDICATOR

The final third quarter GDP number came in at 2.0%. That was a slight disappointment since the preliminary figure was 2.2% a month earlier. The good news is this sluggishness gives the FED no cause to take action to slow the economy. As the first week of the New Year ends, all eyes will be on the employment report, particularly the closely followed nonfarm payrolls which will be announced on Friday. We shall have to grind this one out and see if growth has bottomed and will turn upwards into 2007. The fourth quarter advanced GDP report comes out January 31st. For now, I rate this indicator as bullish.

SENTIMENT INDICATOR

Analyzing sentiment is something that Bob added to his "model" after the poor performance he suffered in the 1987 to 1991 time frame. When I first recall him mentioning it, the primary data point was the Investors Intelligence four week moving average of Bulls/Bulls + Bears. That data point has been in the 50s for most of the summer through the correction which is a neutral reading. In mid-October, it bumped up into the 60s. It has been in the low 70s since mid-November and has been inching toward the mid-70s the past two weeks. The four-week moving average is now 73.32%. That is in Bob's caution zone. Conversely, the Put/Call ratio continues to show healthy levels of doubt. The 10-day is 0.94, while the 60-day is at 0.88. Though it is not part of Bob's model, the American Association of Individual Investors has been a more reliable sentiment measure at least this year, and is currently at 56.1% and the four week moving average is 54.02%. I would rate the sentiment indicator as bullish right now.

I believe that as time goes by, Bob has learned more about technical analysis and added other data points to this Indicator in an attempt to diversify and avoid mistakes. During the panic of autumn 1998, Bob started talking about other indicators such as the Put/Call ratio. It was also then he seemed to key in on market internals such as new highs/new lows, advance/decline, volume, etc. He liked to see the market make a bottom and then drift higher, then retest the low on lighter volume. The theory was that those that were going to sell already did and that only left buyers left to move the market. To my way of thinking, the Sentiment Indicator is BULLISH.

CONCLUSION

To summarize, I believe Bob Brinker's timing model is still Bullish with three bullish and one neutral indicators. With valuations so reasonable and the large increase in earnings estimates, I would say that Bob Brinker views the future as bright for the U.S. equity markets, but at the same time realizes corrections do happen. I don't think Bob would be panicked to see a correction take the S&P 500 back under 1300. In fact, I would expect Bob to see that as a buying opportunity.

Steve Thompson

Bob Brinker Timing Model Update For October

Steve Thompson’s Bob Brinker Timing Model Update For October 2006

Steve gives his update of Bob Brinker's Market timing model indicators. At the end of the article, Steve predicts if Brinker will remain bullish or turn bearish.

• Steve Thompson's Bob Brinker Timing Model Update For October 2006
  
  The stock market is performing beautifully as we begin the fourth quarter. It seems some of the cash on the sidelines came into equities in September as oil prices dropped. It looks like earnings are going to be strong and bond yields have dipped, so investors have been gravitating towards stocks. With no major weather interruptions and things calming down in Iran and North Korea the near term looks hopeful for the U.S. stock market. It is possible the Mid term presidential cycle lows came earlier this year, in June. Those that bailed out of the market in May and hoped to get back in this autumn could do so now with only a minor loss after sitting out a shaky summer.
  
  Let's see how Bob Brinker maybe interpreting his model as we begin the fourth quarter.
  
  Valuation: We shouldn't be surprised to see the S&P 500 near recovery highs with the lack of bad news lately. Using Bob's $82 estimates for 2006 S&P 500 earnings we get a P/E in excess of 16. Investors are comfortable and could very well drive the multiples higher. For now the market is undervalued. Valuation is bullish.
  
  Monetary: Real seasonally adjusted M-2 money supply is still sluggish coming in at a meager .7% annual growth. The next two CPI releases are going to be worthy of attention as we hopefully work through the energy induced inflation spike last fall. I have noticed of late Bob is much more happy with FOMC chairman Ben Bernanke after they paused in August and September. Towards the end of this year the effects of the last rate increase of June should be working its way through the economy. For now I see this indicator as neutral.
  
  Economic: Final Second Quarter GDP came in a 2.6%. This should be no surprise, as we all know housing has cooled. I did notice a couple flies in the GDP ointment. The core inflation component of the GDP report, personal consumption spending was revised down to 2.7% from 2.8%. This is hotter than the FED would like. Corporate profits took a big hit, revised down to a measly 0.3% from 2.1%. Is this an early sign future earnings will take a beating? Or is it the normal ebb and flow nature of the business cycle? We shall know in the fullness of time. Last Friday's Chicago PMI report surprised economy watchers coming much stronger than expected. Conversely the ISM numbers came in soft and could be indicating slower growth ahead. Look to the September jobs report on October 6th for some guidance in sorting this all out. For now I'd rate this indicator as bullish, we are still growing but not at a pace that warrants short term rate increases.
  
  Sentiment: The Investors Intelligence survey has been very stable all summer and is now working its way to the upper 50s territory. It still shows a healthy level of respect. The latest four week moving average of bulls/(bulls+bears)= 57.38%. As we look to the 10-day Put/Call ratio we see .95, which is shows plenty of pessimism. The 60-day level is even more impressive coming in at .98! As a contrarian indicator this is bullish.
  
  CONCLUSION: I believe Bob Brinker is still bullish on the market as we are one good day away from his minimum target on the S&P 500 of 1350.
  
  Steve Thompson

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Bob Brinker's Background

As the unofficial biographer of Bob Brinker and keeper of sacred knowledge of the inner workings of the long term stock market timing model, I believe I may be able to offer some background information on Mr. Brinker.

For starters, he graduated from LaSalle College High School. He obtained an undergraduate degree in economics from LaSalle University. He was in the Masters Program at Temple Univesity Radio School of Broadcasting.

Mr. Brinker was also a racetrack announcer in Pennsylvania and New Jersey. He was track announcer for Sprint Car and Midget Car racing at Hatfield Speedway, and Modified Stock Car racing at Nazareth Speedway and Harmony Speedway. He also announced at Fort Dix Speedway. Bob even did harness race announcing at Dover Downs. Dogs and cars didn't satisfy his craving though! Bob even was a broadcaster for Big Five NCAA basketball and Princeton football.

Prior to starting with Moneytalk, Bob worked in two positions primarily over a 20 year time frame: He worked as the U.S. portfolio manager for the London-based Guardian Royal Exchange Group and before that, as a vice president for the Bank of New York.

In October of 1981, Bob began broadcasting a weekly investment program on WMCA in New York. It was only broadcast in New York. In 1986, Bob started Moneytalk which was broadcast nationally by the ABC Radio Network.

- David Korn,

Editor of David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.

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Bob Brinker on Price of Oil vs Inflation

Inflation is the loss of purchasing power. Most people understand that higher prices mean you can buy less with a given amount of money but Bob Brinker says otherwise.

5/12/06: Price of Oil and Inflation

Bob Brinker says Ben Bernanke, the chairman of the Federal Reserve, has it wrong. Bob Brinker says higher priced oil is not inflationary.

In his April 30th, 2006 monologue, Bob Brinker said:

"We have kept you informed what is really going on in the world of inflation, which is virtually nothing. As you know, oil prices have skyrocketed and are now setting up near all time highs in the low $70s. Oil prices literally going through the roof, and yet to the consternation of many, not listeners to Moneytalk, but to many, including, apparently, the Fed Chairman, they think oil prices are inflationary. That's because they don't understand, they don't understand the taxing effect that these higher gasoline prices have on your pocketbook.

As we've discussed on the program, the vast majority of people in America today cannot even afford to fill up their gas tank. They can't put the $40, $50, $60, $70 worth into their gas tank because they don't operate on a budget like that. Sure, there are some well-heeled that can do it and not care very much about it, but the vast majority of Americans cannot even afford a $40, $50, $60, $70 fill-up on a regular basis-they just can't afford it.

Perhaps Bob Brinker's listeners really cannot afford to fill their gas tanks but I see little difference between Brinker's low-income listeners paying more for gasoline or for rent. An increase in either gasoline or rent is inflationary because it is the total spending and how much you get for it, purchasing power, that matters. If the poor can't afford increases from inflation then they usually downsize their standard of living such as moving to a cheaper apartment, taking the bus rather than driving or eating cheaper food. Some will even get a second job to "make ends meet." The middle class usually saves less and those of us who can afford it, we might give less to charity or spend less on our luxuries. One thing remains constant, higher priced gasoline means we all can't afford what we could before unless we get a raise to compensate for higher prices.

Inflation is near 15-year highs. I have charted the price of Oil and Inflation between 1994.

From the charts, you can see that the ups and downs for inflation seem well correlated with the price of oil. To argue otherwise seems rather foolish to me.

Bob, a "taxing effect" means you get less of something, not a sign change.

Bob Brinker Update for 3/14/06

Bob Brinker is bullish and remains fully invested in his equity portfolios. For new money, he recommends dollar cost averaging. My favorite Bob Brinker Reporter, David Korn, writes:

• * NEW MONEY TO INVEST February 18-19 Newsletter:
  
  Caller: This caller was gifted quite a few shares of a company stock and he wants to sell it and raise cash to invest into the market. How should he go about it? Bob first talked about how much gains have been in the market since his buy signal in March 2003, and then recommended that for new money such as the cash he raises from the sale of the gifted stock, Bob would adopt a dollar cost average approach and use something like a total stock market index fund or an S&P 500 fund to invest. You could also invest the money in an exchange traded fund like the VIPERs (ticker: VTI). Bob said he would dollar cost average "at a pace you are comfortable with" as long as Bob's outlook on the market remained favorable. For now, however, Bob said his market outlook remains favorable as it has since March 11, 2003.
• 
  
• OPENING MONOLOGUE - YIELD CURVE March 4-5, 2006 Newsletter:
  
• Brinker Comment: Bob opened the weekend broadcast by discussing the so-called "inverted yield curve." Bob said there is a lot of misinformation about the yield curve. The definition of the true yield curve is the difference between the 90-day Treasury Bill and the long-term Treasury Bond which is now the 30-year Treasury, currently maturing in February 2036 which has an annual coupon of 4.66%. It was auctioned for the first time in 5 years, and now it is out there trading. At present, the 91-day Treasury Bill is currently yielding 4.48%. We look at the difference between the 90-day and 30-yr. and can see an 18 basis point (0.18%) positive yield slope. Thus, we do NOT have an inverted yield curve and it isn't even totally flat. Bob said it gets him crazy when he reads all the stupid wrong information about the yield curve!
  
• David Korn Comment: You know it pains me to say this, but Bob is wrong. Yes, wrong. Ooh, it gives me chills just writing it. I know its hard to believe; after all, in 20 years, how many times has Bob said he was wrong?" [snip] Bob has chosen the 90-day versus the 30-year probably because of the seminal study that I have linked to in the past. However, there have been other serious published studies that compare the 90-day to the 10-year and other spreads. The question shouldn't be which is "right" but rather, which is the most accurate in terms of forecasting recessions. John Mauldin has written a great series on the yield curve. Read Part 8 if you want to see what I am referring to. You can find it here.

In our Bob Brinker Discussion Forum we've been talking about Bob Brinker's market timing model. He uses this in his "Marketimer Newsletter" for predicting the stock market in the months ahead. On recent shows, Bob has recommended I Bonds for purchase. I Bonds are currently paying 6.73% on new money as I explained in my article called I Bonds.

• [ More Information and links at "I Bonds Explained" ]

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