Bob Brinker Shadow Stock Market Timing Model Update

Bob Norton has udated the "Bob Brinker Shadow Long Term Stock Market Timing Model" and reports it "remains in favorable territory as we move into the month of January 2008. "

The "Shadow" Long Term Stock Market Timing Model now has 3 bullish indicators and one neutral.

This is a "A Special Report" by Bob Norton for Bob Brinker Fan Club readers. You can read the whole report here.

Read Bob's full report to see if you agree with his conclusion and update on the four basic model indicators:

• Valuation
• Monetary
• Sentiment
• Economic Cycle

Then give Bob your feedback on this in our Bob Brinker Free Discussion Forum at facebook's "Investing for the Long Term" group.

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 follow the instructions at the Bob Brinker Fan Club.

Click Bob Norton for more articles by Bob Norton.

Bob Brinker's Mid 1400's Buying Opportunity

As we review the charts, it appears Bob Brinker's advice to dollar cost average "new money" into the market with prices in the "mid 1400's" attractive for lump sum purchases will work out well if the Santa Claus Rally takes us back into the 1500's.

Click chart to see full sized version courtesy of stockcharts.com

Honey's Bob Brinker Beehive Buzz reported:

In July, 2007 Marketimer, Bob Brinker predicted a "move into the S&P 500 Index 1600's range as we move forward....."
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In August, 2007 Bob Brinker said: "We rate the stock market as attractive for purchase on weakness that occurs in the area of the S&P 500 Index mid-1400's. Above that level, we recommend a dollar-cost- average approach."
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Brinker repeated the "mid-1400's" buy signal in September, October, November and December.

Friday's close of 1484.46 was above my definition of "mid 1400's" or 1420 to 1480.

Click chart to see full sized version courtesy of stockcharts.com

Your mileage may vary, but investors had several opportunities to buy under 1450 with the S&P500 hitting 1435.65 intraday in December 2007 after hitting 1406.10 in November.

I hope you did your "Christmas Shopping in the mid 1400's" and unwrap stocks at higher prices in the coming happy new year!

Merry Christmas Everyone!

Bob Brinker Moneytalk Recap: Saturday Dec 15, 2007

Bob Brinker FINALLY correctly stated the link for oil prices and CPI, a measure of inflation, Saturday.

If anyone wonders if Bob Brinker reads the blogs and message boards that are critical of some of what he says, yesterday's complete about face where he correctly stated the FOMC could raise rates to lower the impact of higher price oil on inflation should end all doubts. This is what I've been posting for some time to those who have said Brinker is right that higher priced oil is not inflationary.

My Friday article "Bob Brinker WRONG about Oil Prices and Inflation"

Brinker also correctly said that it is hard to lower the demand for oil by raising rates because much of the new demand comes from China and India. We can slow their demand for oil by killing demand in the US , their big customer, via a recession or slowing growth to just above zero but those economies will still want to grow as they embrace capitalism.

About the only thing he held on to from his past incorrect statements about oil not being inflationary was saying "core inflation is up a small 1.9% despite huge gains in oil prices." This is not "small" and is at the upper end of the Fed's acceptable range of 1 to 2%. It was higher at 2.9% earlier this year but when core inflation fell to under 2%, the FOMC started cutting rates. Given the collapse in the housing market, if not for inflation from higher priced oil and other commodities, we might be worried about a dangerous deflationary spiral from falling housing prices and repriced SIVs (note #1).

Bob Brinker made a lot of good comments about how we wasted our opportunity to get off Middle East oil after the 1974 embargo. His guest, an auto writer emeritus from Forbes, said America is a bunch of fat people who want and need big, comfortable cars to drive to their $100,000 jobs and the current price of oil is not a big deal relative to being comfortable. He also said this was true in Europe too where rich Germans love their big, powerful cars. (just look at the big, powerful, heavy Audi's, BMW's and Mercedes with 8 cylinder engines. ) The guest also said he believes gasoline will have to get to about $7 per gallon before Americans make significant changes in driving habits.

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Notes:

1. SIV is "Structured Investment Vehicle." Here is a good article on SIVs called "Shedding Light on SIVs"

Bob Brinker WRONG about Oil Prices and Inflation

For years Bob Brinker has been telling his audience that higher prices for energy, especially oil for heating and gasoline, were not inflationary. (Reference 2006 Monologue "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.")

Brinker correctly says higher energy prices "act like a tax" and slow growth, but he forgets that tax rates are not 100%. This means that oil prices are "less inflationary" than if they didn't act as a tax, but they are still inflationary. Taxing your pay check doesn't mean your pay check turns negative! It just means you get LESS take home pay. Likewise, the "taxing effect" means you get less inflation pressure from the higher prices, not a sign change!


When the inflation component for iBond rates came in at a very low 1.0% last year, Brinker said this "proved he was right" about higher energy prices not causing inflation. I posted a note at the time showing that the price of oil was down 0.6% year-over-year for the period used to set I-Bond rates so it didn't prove what he said. (see I Bonds Explained)

Today the Wall Street Journal reported "Inflation Accelerated Last Month On Higher Prices for Energy"

WASHINGTON -- U.S. consumer prices surged in November on the back of sharply higher energy prices while underlying inflation accelerated at its fastest pace in 10 months, providing fresh evidence that the disinflation trend in place for much of 2007 may be coming to an end.

The data could complicate the Federal Reserve's task of addressing downside economic growth risks at a time when officials remain worried about inflation, and may make them less willing to use their main interest-rate tool to address credit-market strains.

The consumer price index jumped 0.8% in November, the Labor Department said Friday, up sharply ...

To read the rest of the article: 75% off the Wall Street Journal + 8 Weeks FREE!

Lately Bob Brinker has tried to distance himself from his incorrect statement that higher priced oil is not inflationary by saying it doesn't cause core inflation to go up. Well, core inflation is CPI inflation with the more volatile food and energy prices removed. So, of course higher priced energy won't cause a big change in core inflation when you remove energy prices from the calculation!

MarketWatch reported this AM:

U.S. Nov CPI up 0.8%, core rate up 0.3, higher than forecast
Last update: 8:30 a.m. EST Dec. 14, 2007

WASHINGTON (MarketWatch) - The underlying rate of U.S. inflation accelerated in November, the Labor Department said Friday. The consumer price index increased 0.8%, driven by a 5.7% gain in energy prices, the fastest increase in energy prices since March. This is the biggest gain in consumer prices in more than two years. Food prices rose 0.3%, and apparel, airline and drug prices also spiked. The core CPI, which excludes food and energy costs, was up 0.3% in November, the biggest gain since January.

November core inflation at 0.3% times 12 months comes in at 3.6% a year, certainly not "low core inflation" by anyone's definition.

FOMC chairman Ben Bernanke says "price shocks" from higher prices for energy or other commodities like food can cause core inflation to go up if "consumer expectations for inflation" expect more inflation in the future. In practical terms, this mean core inflation will go up if you start telling your boss you need a bigger raise to pay the heating bills and gasoline bills to commute to work just to break-even. As today's inflation data shows, this is starting to happen.

The price of gold is considered the ultimate "inflation hedge" and it is soaring.

This is a very interesting chart from Chart of the Day

"Today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 16.7 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces back in the year 1999. When priced in gold, the 21st century US stock market has been in one big bear market."

I can't wait to hear how Bob Brinker spins the inflation data this weekend. Even if he doesn't admit he was wrong and the Fed was correct to be worried about inflation, it should prove to be an entertaining show.

Highest Yielding Certificates of Deposit

Yesterday Bob Brinker recommended a caller consider CDs rather than US Treasury Bonds or notes because CDs are paying better rates.

A 3-month Treasury Bill currently pays 3.07%, the 5-year note pays 3.50%, the 10-year bond pays 4.11% and the 30-year T-Bond pays 4.57%

From the Highest CD Rates Survey at forbestadvice.com, the best CD rate is 5.45% at Countrywide Bank for 3 months

Below are some more rates, terms and where to get the CDs

6 Months
5.35% at Countrywide Bank

1 and 2 years
5.21% at Apple Bank for Savings (Scarsdale NY)

3 years
5.00% at Capital One Bank, Eastern Savings & Flagstar Bank

5 years
5.26% at Apple Bank for Savings

7 and 10 years
5.10% at Capital One Bank

CDs are also paying better rates than iBonds which currently pay 4.28% (I-Bond Details)

Asset Allocation Question

I am sure Bob Brinker Fan Club members would be interested in this question from our forum "Novice Corner - A place to learn and help others" in the facebook group "Investing for the Long Term."

JG Singh asked:

My question is regarding diversifying or balancing my portfolio.

I have two 401k accounts, 2 IRAs, 2 rothIRAs and a trading account. I have noticed that I have been diversifying and balancing each account on its own resulting in too many positions and more diversification than probably needed. As a result I move with S&P. (altough I am recovering faster than S&P since last week)

What should my approach be? should I be diversified overall (in combined portfolio) or should I worry about diversifying them individually?

I am sure most of you have multiple accounts, how do you deal with this issue?

My reply:

I not only have multiple accounts, but multiple strategies as I experiment with new ideas. I believe in diversification of strategies not just asset classes so I have some "buckets of money" that follow my explore portfolio, some that follow index investing and some that I use to "wing it."

The most important thing to do is put it all on a single spreadsheet where you track your overall asset allocation. It doesn't matter if you have my free portfolio that consists of 120 less your age in equities (VTSMX) with the remainder in Total Bond (VBMFX) or the 7 Vanguard Index Fund core portfolio I recommend in my newsletter mixed with 16 stocks from my explore portfolio and 100 stocks and funds you've accumulated over the years. You want to start with EVERYTHING on a single spreadsheet to see where you are.

The hardest part with putting it all on a single spreadsheet is figuring out how your managed mutual funds are allocated. Mutual funds often have “style drift” where they might start out as a small cap US fund, do great for 10 or 20 years then drift into international and large cap funds as they try to invest the money that keeps flowing in. I’ve owned Fidelities fantastic Contra and Low Priced Stock funds for a long time and they have crushed the S&P500.

Chart of relative performance

Click to see full sized chart courtesy of stockcharts.com

• Fidelity Low-Priced Stock Fund (FLPSX)
• Fidelity Contrafund(FCNTX)

As you can see from the links, FLPSX has drifted to a “mid-cap blend” whereas I bought it in 1998 when it was a small cap value fund. I bought FLPSX to diversify from my small and large cap growth stocks that I made a small fortune on in the 1990’s. Value and small cap have done great the last decade vs.growth so the fund’s style has drifted. Not only that, but FLPSX is only 65% in the US and 35% overseas (Fund Holdings) as it has gone overseas to find value. Its top holding as of 9/30/07 was Petrobras, the oil company in Brazil!

If you really want to stick to plan, you should update your asset allocation to account for style drift each year and make sure you break-down your large holdings into their component asset classes, especially if this materially changes your overall asset allocation.

Make sure you visit:

• Highest CD Rates
• Major World Market Graphs
• Market Sentiment Indicators

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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

• EC: AAII: American Association of Individual Investors Bull/Bear Index: Charts and More Info

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.

• EC: Investors’ Intelligence Bull Bear survey: Charts and More Info

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.

• EC: You can ask questions of Lakshman Achuthan in our Facebook discussion forum "ECRI Data (Economic Cycle Research Institute)"

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.)

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EC: Great work Bob! Thanks.