Effect of Bob Brinker's QQQQ advice on his Reported Model Portfolio Returns

This article examines the effect of Bob Brinker's QQQQ Advice on his model portfolios.

In Jan 2000 Brinker moved 60% of his equity portfolios to cash. In August 2000 he moved another 5% to cash for a total of 65% in cash reserves. He told subscribers to wait for instructions on how to use these cash reserves. If he had stayed there, this move would have looked brilliant. But, the story is only beginning.

On October 16, 2000, Brinker’s subscribers got a special bulletin vial USPS mail advising the they could"Act Immediately" and buy QQQ in anticipation of a 2 to 4 months "counter trend rally" for a 20% or more gain. Confused callers to the Marketimer office were told "Bob is comfortable with QQQ at $86" by office staff. You can read the rest of what happened at Bob Brinker's QQQQ Advice but basically the QQQ(Q) fell from a high of $87 to just under $20 and Bob held all the way down. This was not reflected in his model portfolios where he kept the 65% cash reserves in cash, thus having it both ways.

In the October 2000 bulletin, Brinker recommended 30 to 50% of cash reserves be put into QQQ(Q) for his aggressive (Model Portfolio #1) subscribers. The average price for the week after the bulletin was sent was about $82.
PRICES for QQQQ

• P1 money market allocation on 9/30/2000: $95,359
• Adjusted P1 money market allocation after QQQ buy: $47,969.50
• Added P1 QQQ allocation: $47,969.50

In the March 2003 bulletin, Brinker made no mention of the prior advice for QQQQ but he recommended subscribers return to a fully invested position per the model portfolios.

Reported P1 money market allocation on 2/28/2003 : $102,716

Since the money market balance includes the accumulated interest, removing half of the ending balance from the March 2003 total automatically takes into account the loss in interest. This reduces the money market balance by $51,358.

QQQ closed at about $24 on the day the second bulletin was issued, and again on the next day. Since Brinker's new P1 recommendations were all mutual funds, the closing price is the one he had to use in calculating his reported results.

March 2003 PRICES for QQQQ

The $47,969.50 in QQQ was reduced to $47,969.50 x 24/82 = $14,039.85.

The reported balance for P1 on 2/28/2003 was $126,712. We need to subtract the half of the money market fund that was used to buy QQQ and replace it with what was left of the QQQ holding.

• $102,716 - $51,358 + $14,039.85 = $89,393.85 "adjusted" P1 balance.

Calculate the reduction in Model Portfolio #1 reported results due to QQQ:

• [($126,712 - $89,383.85) / $126,712] x100% = 29.5%

Thus, anyone who followed Brinker's advice with 50% of cash reserves that was also in his "model portfolio for aggressive investors" saw their totals reduced 29.5% from what Brinker reports in his advertising.

• Brinker's P1 on 01/01/88 $20,000 Brinker's P1 on 07/27/07 $206,144
• Brinker's Reported APR 12.7 %
• QQQQ Effect is 29.0 % or $59,782
• Subtract QQQQ Effect $146,362
• QQQQ Adjusted APR 10.7 %
• Wilshire 5000 APR 12.0 %
  (Wilshire 5000 APR over the period 1/1/88 to 7/27/07 was calculated by Padraig Cremin of Wilshire Associates Inc and "Ivan Smile". )

What do you think? Did I make a mistake on any of these calculations?

Conclusion: I calculate the QQQQ advice caused Brinker's reported total to drop by 29% and his APR to drop 2.0% a year such that his best performing portfolio #1 under performs the buy and holders of the Wilshire 5000 by 1.3% per year since the inception of P1.

Please post your questions below.

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