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Bob Brinker Update for Sept 2006

Bob Brinker's 5 Root Causes of Bear Market Update for September 3, 2

Sep 4, 2006 Kirk Lindstrom

This article examines Bob Brinker's 5 root causes for a bear market as of September 3rd of 2006.

September 3, 2006: 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

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  1. Tight Money:
  2. Rising Rates:
  3. High Inflation:
  4. Rapid Growth:
  5. 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:

    .
  1. Tight Money: He said the Fed was reducing M2 to slow growth - BEARISH
  2. Rising Rates:He was predicting higher long and short term rates to continue. This did not happen but it was - BEARISH for his model..
  3. 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.
  4. Rapid Growth: Real GDP growth was approaching 5%. Bob felt the FED would use rates to try and slow this. This was was BEARISH and correct.
  5. Over Valuation: "We believe valuation levels in the U.S. market are stretched to the limit." BEARISH

All 5 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 September 3, 2006:

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  1. Tight Money. Economagic.com shows the growth of M2 Money Supply is still positive at 4.03%, slightly above the 3.40% annualized inflation rate for the same period. Bob is happy as long as M2 is growing faster than inflation. I rate this as BULLISH.
  2. 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. 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 did not raise rates at the last meeting, which made Bob Brinker very happy. The 10-year Treasury bond remains "well behaved" at 4.73%. Since January 2000, the 30-year Treasury bond is actually down 0.51% from 5.38% to 4.87%. With the two your note at 4.76%, I believe long-term rates are forecasting that the Fed will lower rates by 0.50% or more in the next two years, which would make Bob's prediction, come true. Thus, I think Bob will call this BULLISH.
  3. High Inflation: NO WAY!. As long as there is the internet and FedEx connecting China and India to the US, I don't see wages being in danger of spiraling higher thus little danger of high inflation. I bet we solve our heath care problems by importing more doctors from China and India just as we are doing to find low paid workers at Wal-Mart and McDonalds. Sure higher priced commodities, especially oil, has total and core inflation at the high end of the range we've seen in the recent past, but inflation is still well below the problem levels of the 1970's and 1980's. BULLISH
  4. Rapid Growth: This is not a problem. In fact, growth is slowing and ECRI reports their weekly leading index, WLI, has slipped into slightly negative territory. From "9/1/06 WLI Flat". The flatness of the annualized growth "doesn't override or reverse the downward momentum that we've seen recently" , said Lakshman Achuthan, a managing director at ECRI."With weekly leading index growth in a clear cyclical downswing, U.S. economic growth prospects remain dull," Achuthan said.. Lakshman said on Bloomberg TV Friday (9/1/06) that they were not making a recession call because, among other things, job growth was still good. On the radio, Bob said he is not calling for a recession. BULLISH
  5. Over Valuation: For my September newsletter , I wrote in "Standard and Poor's estimates 2006 "Bottoms Up" operating earnings for their S&P500 will be $86.51. At $1,291, this gives a price to earnings ratio (PE) of 14.9. The 10-year US Treasury bond is yielding 4.86%, 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! 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.

Discuss Bob Brinker and his timing model in our Bob Brinker FREE Forum and Visit the Bob Brinker Fan Club for information on how to get these updates emailed to you as soon as they are published.

Prior Updates

Free Charts and Other Stuff

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.

The copyright of the article Bob Brinker Update for Sept 2006 in Investment is owned by Kirk Lindstrom. Permission to republish Bob Brinker Update for Sept 2006 in print or online must be granted by the author in writing.
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