This article looks at Bob Brinker's 5 root causes for a bear market. Please post your comments in our "Bob Brinker Free discussion forum"
In part 1 we reviewed what caused Brinker to turn bearish in January 2000. Now, let's look at the 5 Root Causes of a Bear Market as of June 6, 2007:
Tight Money. Economagic.com shows the growth of M2 Money Supply is positive at 9.72%. 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: The idea behind this indicator is one of the ways to start a bear market is for the Federal Reserve to start a recession by going to far in raising rates. Brinker was correct that the Fed tightned too far in 2000 but so far in 2007, the Fed seems to have learned its lesson and is doing a great job.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. He 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 4.90%. 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 recently said "the Fed will eat crow " and lower rates to prove he was right all along about higher priced oil not being inflationary. I think that is like telling a fireman after they put out a fire "you didn't need to put water on the fire. It went out just as I said it would." You have to love Bob's modesty! I think Bob has had this indicator BEARISH while I have it as neutral or even bullish.
Note, in past updates, I had this as BULLISH but I now think that was a mistake. I was using my interpretation of the data rather than Bob's interpretation of the data. Brinker has said many times he thinks the FOMC should have the Fed Funds rate between 4.0 and 4.5%, not its current 5.25% level, thus I think Brinker views this as BEARISH
High Inflation: Despite the inflationary pressures of higher food and energy, Federal Reserve monetary policy (including higher rates) has kept inflation from getting out of control . Sure higher priced commodities, especially oil, has core inflation above the one to two percent "comfort zone" for the Federal Reserve, but inflation is still well below the problem levels of the 1970's and 1980's. Unlike Brinker, I believe the Federal Reserve, led by Allan Greenspan and now Ben Bernanke, has done a fantastic job of deflating the housing bubble and limiting the inflation effects of higher priced oil without sending us into another recession. Overall, this is BULLISH
Rapid Growth: This is not a problem. In fact, GDP has been below trend mostly due to the Federal Reserve keeping rates high to control inflation. Q1-2007 GDP growth was estimated to be only 1.3% after Q4-2007 came in at 2.5%. Today the government announced GDP came in at a very weak 0.6%, the lowest since Q4 2002 when it grew only 0.2%. On the radio, Bob said he is not calling for a recession. ECRI is calling for growth to improve, but they are not looking for rapid growth. BULLISH
Over Valuation: In the June 2007 issue of "Kirk's Investment Newsletter," I wrote in "Standard and Poor’s estimates 2007 "Bottoms Up" operating earnings for their S&P500 index will be $94.11, up from $93.01 last month. At $1,501, this gives a price to earnings ratio (PE) of 16.0 on 7.3% earnings growth over 2006. The earnings yield, inverse of the PE, is 6.3% for 2007. The PEG, PE over earnings growth rate, is 2.2. The 10-year US Treasury bond is yielding 4.70%, well below the S&P500 earnings yield so the market is not over valued according to the “Fed Model.” Despite the recent record level of the S&P500 and the Treasury yield increasing to 4.90%, the PE and earnings yield are still quite BULLISH.
What do you td I make a mistake on any of these five indicators? I have all FOUR as BULLISH and ONE BEARISH the way Brinker looks at his model. Agree or disagree, I believe Bob Brinker will continue to be bullish.
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 June 2007 Part2 in Investment is owned by Kirk Lindstrom. Permission to republish Bob Brinker Update June 2007 Part2 in print or online must be granted by the author in writing.
