Bob Brinker Update for Jan 2007
Examine Bob Brinker's 5 Root Causes of Bear Market 01/14/07
Jan 14, 2007
January 14, 2007: In Bob Brinker's January 2000 Marketimer he published his "Five Root Causes for a Bear Market."
I believe none of Bob Brinker's "5 Root Causes of a bear market" are present today so Brinker will remain bullish. Before I examine the causes in detail, lets look at them in an historical perspective.
The 5 root causes of a bear market are
- Tight Money:
- Rising Rates:
- High Inflation:
- Rapid Growth:
- Over Valuation:
[Note: Discuss Bob Brinker and his timing model in our Bob Brinker FREE Forum.
In January 2000, Bob Brinker advised taking 60% out of the market because:
- .
- Tight Money: He said the Fed was reducing M2 to slow growth - BEARISH
- Rising Rates:He was predicting higher long and short term rates to continue. This did not happen but it was - BEARISH for his model..
- High Inflation: He said the CPI was approaching 3% and import prices were up 5% which would further impact inflation. We didn't get high inflation, but this was BEARISH for his model none the less.
- Rapid Growth: Real GDP growth was approaching 5%. Bob felt the FED would use rates to try and slow this. This was BEARISH and correct.
- Over Valuation: Bob wrote: "We believe valuation levels in the U.S. market are stretched to the limit." BEARISH
All five of his root causes were BEARISH in January 2000. On the radio program at the time, he said he was not bearish, but the odds favored a decline over the market going up more than 5%. As such, he recommended reducing the equity allocation from 100% to 40% in his model portfolio numbers one and two. He also lowered his Model Portfolio III (which is a balanced portfolio) equity allocation from 50% to 20%. In August of 2000, when the market was a bit higher, he recommended taking another 5% out of equities for a 65:35 Equities-to-Cash asset allocation.
Then in October 2000 Brinker recommended putting 20 to 50% of cash reserves back into the market via the NASDAQ100 (QQQQ Bulletin for a counter trend rally despite saying his model had not given a buy signal. The QQQQ trade was a disaster, but his long term model was correct to predict further weakness because 2001 and 2002 were both down years for the markets.
The markets bottomed in October 2002 and his model correctly gave him a bullish buy signal within 5% of the S&P500 bottom in early 2003. Since returning to 100% invested in March 2003, Bob Brinker has correctly remained fully invested with no QQQQ-like side trips to hurt his performance.
Now, let's look at the 5 Root Causes of a Bear Market and see where they stand today as of January 14, 2007:
- .
- Tight Money. Economagic.com shows the growth of M2 Money Supply is positive at 5.38% with annualized inflation at 1.97%. This means the Fed is increasing the real money supply at a healthy (5.38%-1.97%) 3.41% rate. With M2 growing faster than inflation, I rate this as BULLISH even though Bob has been upset with the Federal Reserve for raising the Fed Funds rate above 4.5% to its current 5.25%.
- Rising Rates: After the Fed raised rates to 5.25%, Bob said on the radio Saturday 06/03/06 that he thought the Fed had gone too far and will have to lower rates. Brinker says they should have stopped at 4.5%. The Federal Reserve has raised short-term Interest rates from a low of 1.0% on June19, 2004 to their current 5.25%. After an historic 17 straight rate increases, the Fed has held rates steady at 5.25% . The 10-year Treasury bond remains "well behaved" at 4.77%. Bond investors have long term rates lower than short term rates as they believe the Fed will do what it takes to get core inflation back under 2.0%. Bob said on the radio he thinks the Fed will eat crow and lower rates to prove he was right all along. You have to love Bob's modesty! I think Bob will call this indicator BULLISH.
- High Inflation: NO WAY!. As long as there is the internet and FedEx connecting China and India to the US, I do not see wages being in danger of spiraling higher thus little danger of high inflation. CPI inflation has come down with the fall of oil from near $80 to $53 in a matter of months. Core inflation has remained higher than the Federal Reserve would like, but with the price of oil falling, pressure on core inflation should subside. We know Bob thinks higher oil prices don't cause inflation, but energy prices are a component of CPI which is the official measure of inflation. If energy prices continue to fall and the Fed lowers rates, we could see the housing bubble come back and an economic boom start. I believe the fed has done a great job and correctly balanced inflationary pressures against an economic slowdown. What matters is inflation remains low which is BULLISH
- Rapid Growth: This is not a problem. In fact, GDP for Q4 looks to be about 2.0%, below trend and anything but hot. Rapid growth can lead to a recession but ECRI reports their weekly leading index, WLI, is now at a 47-week high after correctly predicting the current economic slowdown. With WLI in an uptrend, ECRI says "the U.S. economic growth outlook has been improving slowly but steadily." On the radio, Bob said he is not calling for a recession so all in all, this is BULLISH
- Over Valuation: For my January 2007 newsletter , I wrote in "Standard and Poor's estimates 2006 "Bottoms Up" operating earnings for their S&P500 will be $87.73. At $1,410, this gives a price to earnings ratio (PE) of 16.1. The earnings yield, inverse of the PE, is 6.2%." The 10-year US Treasury bond is yielding 4.77%, well below the S&P500 earnings yield, so the market is not over valued according to the "Fed Model." In fact, the PE ratio for the S&P500 is its lowest levels since 1991! This is BULLISH
What do you think? Did I make a mistake on any of these five indicators? I have all five as bullish the way Brinker looks at his model. Agree or disagree, I believe Bob Brinker will continue to be bullish.
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Since beating the market is hard for most to do, I recommend a "Core and Explore" approach to investing. Core means place 80 to 99% of your money into a CORE, buy-and-hold, no load, mutual fund portfolio and then EXPLORE with the remainder. To build your core portfolio, I suggest a diversified basket of index funds
I welcome suggestions for future articles at Kirk's Market Thoughts.
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.
