Bob Brinker Update Feb 4, 2007

02/04/076

In our Bob Brinker Free 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. Many are asking:

"If Bob Brinker still thinks this is a cyclical bull market within a longer term secular bear market, then why is he fully invested so close to the all time high on the S&P500?"

On Saturday Feb. 3, 2007, Bob Brinker confirmed to a caller (call summary here) that he still believes we are in a secular bear market.

This month, Steve Thompson gives his update on Brinker's timing model.

Steve Thompson's Bob Brinker Timing Model Update For February 4, 2007The economic news this week seems to be pointing towards a scenario of stronger growth and weaker inflation expectations. GDP came in at 3.5% stronger than expected but remember this is subject to revision. Core PCE, the FED's favorite inflation gauge, came in at 2.1% down from 2.2% in the previous report. This is still above their preferred range of 1% to 2% but heading in the right direction. The January jobs report showed a meager 111,000 new jobs but this too is subject to revision. The last three jobs figures were adjusted upwards to a level higher than original estimates. On the earnings front it looks like we might eek out another Quarter of double digit growth but future guidance indicates future earnings growth may drop to under 10%.

• Kirk Comment: Don't forget that ECRI is also predicting stronger economic growth ahead as announced in this Friday release.
Small cap and International stocks continue to perform well. Does this indicate the expected new leadership in U.S. Large cap stocks is still to come? Or with the DOW and the Dow Transport Index reaching new all time highs this past week a sign of the best news coming at market tops? The one two punch of stronger GDP and the FED statement bolstered the stock market this week. Let's look at how Bob Brinker might be looking at his stock market timing model.Valuation Indicator: Last month Bob increased his 2007 S&P 500 earnings estimates to $88 from $87.75. Other than minor rounding this will have no influence on calculating a P/E ratio. With the S&P closing Friday at 1448.39 we get a P/E of 16.46, nearly at the mid point of Bob's 16-17 recent forecast. This certainly a friendly figure considering the prospects for continued economic growth and inflation seemingly behaving. A couple of things to consider is what will future earnings be and what will be the quality of those earnings be? At this point I see no reason to worry excessively but they do warrant observation. I consider Valuation at this time to be Bullish.
• Kirk Comment: If we get expanding economic growth as ECRI predicts, then analysts will have to yet again raise their estimates. As Larry Kudlow says of our economic growth, "it is the greatest story never told!."
Monetary Indicator: With the FOMC once again holding short term rates steady and the outlook for future moves in doubt for most of 2007 let's turn our attention to money supply. Real growth in M-2 money supply slightly above 2.3%. If future inflation diminishes this should aid real money supply growth. Keep in mind the FED can also manipulate money supply to fine tune the economy. I suspect Bob is pleased by the taming inflation outlook and is waiting to see a rate cut by the FED and the core inflation figure dip below 2%. For these reasons I would rate Monetary as neutral.
• Kirk Comment: Bob has said in the past that he thought the Fed should have stopped raising interest rates at 4.0 to 4.5%. He has also said the Fed will have egg on their faces and will have to cut rates to keep the economy growing without a recession. It seems Ben Bernanke and Allan Greenspan knew what they were doing.
Economic Indicator: The 4th Quarter 2006 GDP report came in stronger than expected at 3.5%. This could be just the spark for improved future corporate earnings that will allow Bob to increase his earnings estimates again down the road and maintain earnings momentum. We should remain cautious due to the fact that GDP is scheduled for a revision and a final number later this Quarter. For now the future prospects for the U.S. economy are very good and heading in the right direction. Bob may even increase his GDP estimates for 2007. This is bullish.Sentiment Indicator: The 60 day moving average Put/Call ratio is currently favorable at .88 showing adequate bearishness. The Investors Intelligence survey has been running a ratio of bull/bulls+bears in the low 70s most of the time since mid November. This is a caution sign to check the other indicators. One comforting factor is the VIX has remained low. This indicates low expected volatility which for now should limit the downside risks to small health restoring corrections. I would rate Sentiment as bullish.
• Kirk Comment: I just posted my latest chart of investor sentiment and some discussion of what it means here. You can download the chart directly here.
In summary we still have one neutral and three bullish main model indicators. Plenty of reason to remain fully invested. Look to future months to see if Bob raises his 2007 estimates for both GDP and S&P 500 earnings. Should either or both occur that would be a very good sign for the continuation of the bull market..Steve Thompson

Thanks Steve. I agree with your analysis. It will be interesting to see if Bob does too.

• Dec. 31, 2006 update
• Nov. 01, 2006 update
• Oct. 02, 2006 update
• July 5, 2006 update
• April 6, 2006 update

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What do you think? Ask questions about this article and discuss Bob Brinker In our Bob Brinker Discussion Forum.

Kirk Lindstrom: DISCLAIMER: Answers & my words are general in nature, are not meant as specific investment advice, and do not necessarily represent the opinion of anyone but Kirk. Individuals should consult with their own advisors for specific investment advice.

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