Title: LTSMTM
UPDATE November 6, 2007
Author: Bob Norton (with editorial comments "EC" by Kirk Lindstrom)
Discuss this in our Bob Brinker Free Discussion Forum.at facebook's "Investing for the Long Term"
Introduction. Posted Nov 5, post #218 at Bob Brinker Free Discussion Forum
BobN:
Here is my first attempt at a "shadow" Long Term Stock Market Timing Model.
My version of the LTSMTM remains in favorable territory as we move through the month of November.
BobN:
Valuation:
Market close 11/5/07 S&P 1502.
2007 earnings estimate of $93.00 (S&P Investment Policy Committee $95.00) yields a p/e of between 15.8 to 16.1
2008 estimate of $100 (S&P IPC $105) give a p/e between 14.3 to 15.
The
Morningstar Valuation Graph has the overall market firmly in
undervalued territory. The 10 year treasury (currently just north of
4.30%) produces a "Fed Model" p/e of about 23.
INDICATOR = BULLISH.
EC: Bob
Brinker tracks the P/E ratio of the S&P 500 when analyzing the
valuation component of his timing model. In the "Fed Model Update" of
my November 2007 Newsletter I wrote, "Standard and Poor’s estimates
2007 "Bottoms Up" operating earnings for their S&P500 index will
be $93.54, down from $94.54 last month. At $1,541, this gives a price to earnings
ratio (PE) of 16.5 on 6.6% earnings growth over 2006. The earnings yield, inverse of the PE, is 6.1%
for 2007. The 1-yr PEG (PE divided by one-year
earnings growth rate) is 2.0.
The 10-year US Treasury bond yield remains low at 4.65% from
a recent peak of 5.16% in mid June. This
is well below the S&P500 earnings yield so the market is not over valued
according to the “Fed Model.”
Earnings estimates from Standard
and Poor’s website at http://www.standardandpoors.com/
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(LTSMTM
UPDATE
Continued)
Monetary:
The additional Fed Reserve 1/4 point rate cut is a
positive for Mr. Market, even though the necessity for it is open to
debate. As the 10 year bond is trading well below the 5.25% level
reached this past June, long rates are offering no competition to the
potential for stock market appreciation going forward.
Courtesy of Barrons, for the week ending 10/15/07, M2 liquidity growth comes
in at an inflation-adjusted 4.35%, 7370 (latest)/6878(year ago) = 7.15
minus 2.80 (headline inflation). M2 remains favorable for economic
growth (albeit slow growth).
Reuters News Service reported that the ECRI U.S. Future Inflation Gauge (USFIG)
has been falling steadily for the past couple of years. Inflation
pressures are well contained according to ECRI spokesperson Melinda
Hubman.
The PCE recently moved up to 2.4 from 2.0, but the core PCE continues to hold steady at 1.8. No inflation worries here.
INDICATOR = BULLISH.
Sentiment:
The AAII bull/bear ratio has remained pretty much in neutral territory in recent weeks.
The
Investor's Intelligence Survey, which hit an extremely overvalued level
of 75 (bulls over bulls plus bears) two weeks ago, backed off to 71
last week. It has now fallen back to .699.
NYSE Short Interest
levels remain highly favorable (sooner or later the puts will need
coverage). A recent reading on the 60 day put/call ratio stands at
1.035, indicating sufficient bearishness, an excellent contra-indicator
for the intermediate term future.
The ARMS Index shows
heightened activity in declining stocks in the NYSE, but I believe that
any pullback will (hopefully) not morph into anything more than a 4-6%
decline off the 1565 S&P high.
INDICATOR = BULLISH
EC: In the article "Elaine Garzarelli is Bullish: Indicators on a Strong Buy Signal"
I reported Eliaine's "sentiment indicator" is "Neutral." This is
significant because Elaine correctly called the 1987 bear market while
Bob Brinker rode it down fully invested before he went to 100% cash in
early 1988. Bob didn not return to 100% equites until 1991.
Brinker said he added the sentiment component to his model after this
major market timing mistake. He started new model portfolios in
1988 after missing this 1987 bear market.
Black Monday 1987 Graphs
Economic:
With
the 3rd quarter GDP in at 3.9, we have an average of 3.0 for the first
nine months of the year. Even assuming a downward revision to this
number AND a substantially lower number for the 4th qtr (say about
1.8), we will still finish year 2007 with GDP of about 2.5 to 2.7.
Below historic trend growth to be sure, but this is way above the 2
consecutive qtrs of negative growth which would define a recession.
This would be in line with earlier predictions made by Bob Brinker and
other sources upon which I rely.
The most recent comments by
Lakshman Achuthan @ ECRI suggest that we will see more of a slow growth
economy in 2008, not a recession.
INDICATOR = BULLISH
Summary Comments:
All
four indicators are bullish. As more earnings reports come in and we
get through this period of investor angst over the sub prime mess and
performance of a number of financial stocks, I am confident that the
S&P will resume its grind higher.
As we move into 2008, the
health of the timing model needs to be monitored for possible impact
from higher oil prices. While I have largely agreed with Bob Brinker on
the "consumer tax effect" of oil prices, I remain concerned that prices
may finally begin to leak into the PCE and core PCE (note that the PCE
has recently moved up to 2.4 from 2.0). Still, the all-important core
PCE remains stable at 1.8.
There is also speculation in the financial community that the federal Reserve may
be taking a chance on feeding future inflation in order to placate
investors and lessen the damage done by the credit crisis.
If
the dollar continues to fall or if the decline fails to remain orderly,
will this cause long term rates to spike in the months ahead? As we all
know, Mr. Market HATES rising long rates. The cocktail of rising long
rates and elevation in the PCE/core PCE would give Mr. Market a whopper
of a headache!
For my next installment I'm still working on
making this more concise....please pardon my verbosity. Comments are
welcomed and greatly appreciated
EC:
I agree with Bob and would interpret Bob's timing model as bullish at
this juncture.
Bob Norton
EC: Thanks Bob for an excelleny analysis!
EC:
Bob has been consistent in saying that his model is "either bullish or
bearish." In other words, there is no in between. But, Bob's own
"interpretation" of his timing model has suggested that he assigns
various degrees of the bearishness or bullishness of the model.
EC:
On the radio, Bob continues to recommend a dollar cost average approach
for new money while he recommends a fully invested position in his
newsletter model portfolios.
EC: Discuss this in our Bob Brinker Free Discussion Forum at facebook's "Investing for the Long Term"
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