In Bob Brinker's January 2000 Marketimer he published his "Five Root Causes for a Bear Market"
They are
- Tight Money:
- Rising Rates:
- High Inflation:
- Rapid Growth:
- Over Valuation:
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In January 2000, he took 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 was BEARISH and correct.
- 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 Equity:Cash 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 market bottomed in October 2002 and his model correctly gave him a bullish buy signal within 5% of that bottom in early 2003.
Now lets look at the 5 root causes today (04/23/06):
- Tight Money The Federal Reserve has raised short term Interest rates from a low of 1.0% on June19, 2004 to their current 4.75%. The 10 year Treasury is only up 30 basis points from 4.71% to 5.01% and the 30 year treasury is actually down 19 basis points from 5.38% to 5.09%. With long rates still reasonable and the yield curve nearly flat, I'm calling this NEUTRAL.
- Rising Rates: NEUTRAL: Bob and I seem in agreement that the Fed is only normalizing rates. This means they are going up but it really doesn't count because they are going up to where they should be if we had not had a 9/11 attack AND a major recession.
- High Inflation: NO WAY!. BULLISH As long as there is an internet connecting China and India to the US, I don't see wages begin in danger of high inflation. I bet we solve our heath care problems by importing more doctors from China and India which would really be something. Already people are taking "medical vacation" to other countries to get cosmetic surgery and dentistry done at a fraction of the cost.
- Rapid Growth: BULLISH: People worry now over just about everything. They think the housing market will collapse with higher interest rates and we will fall into a recession. ECRI is predicting slow but steady GDP growth and they have an exceptional record.
- From 4/21/06 WLI Slips but Growth Up "With the weekly leading index growth slightly above its longer term average, U.S. economic growth prospects continue to be reasonably positive," said Lakshman Achuthan, managing director at ECRI.
- Over Valuation: BULLISH: On 4/17/06 I wrote in my newsletter "Standard and Poor's estimates 2006 "Bottoms Up" operating earnings for their S&P500 will be $84.81. At $1,289, this gives a price to earnings ratio (PE) of 15.2. The earnings yield, inverse of the PE, is 6.6%. The 10-year US Treasury note is yielding 5.05%, well below the S&P500 earnings yield so the market is not over valued according to the "Fed Model."
What do you think? Did I make a mistake on any of these five indicators? I have 3 at bullish and 2 at neutral.
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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. For the remainder, read my profile here
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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.
