Bob Brinker Fan Club - Steve Thompson's Update on Bob Brinker's Long Term Stock Market Timing Model

Title: LTSMTM UPDATE    April 1, 2007

Author: Steve Thompson (with editorial comments "EC" by Kirk Lindstrom)

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Introduction

SteveT:   As we begin the second Quarter of 2007 we find the S&P 500 made a very slight gain since the end of 2006. At one point we were up nearly 3% for the Quarter followed by a quick drop to down more than 3%. I believe both of these spikes were triggered by over emphasis on the news of the day. Much of this is driven by short term traders trying to scalp out a few percent as an opportunity arises. The long term prospects as far as I am concerned still look favorable. As I see it the two main fret factors for persistent inflation are energy prices and housing cost.

EC: Charts for DJIA - S&P500 - NASDAQ - Russell 2000

SteveT:   I know Bob Brinker in the past has said higher energy prices are not inflationary but a drag on economic growth. I believe he is partially wrong on that. While it is true Joe six pack may trim spending in other areas to pay for $3.00 plus gasoline I believe the effect is minor. The real bite in the pocketbook from high energy comes as it trickles through increased costs of all the essential items we buy frequently. It is difficult to think of an item we purchase that doesn’t require energy to make or ship to the shelf. It seems many of the items I buy keep ticking up each time I go to the store. At some point these cumulative increased costs could restrain my spending for luxury items but we’re not there yet.

EC: Charts for Crude Oil prices

SteveT: Another item that worries me is the effect of rent equivalents in the Consumer Price Index. As many folks find themselves in the position of leaving homes with exotic mortgages they can no longer afford payments, this could increase demand for rentals.

Let’s dive in and take a look at how Bob Brinker maybe interpreting the data.

Valuation Indicator: The S&P 500 closed March 30 at 1420.86 and using Bob’s 2007 estimate of $89 we arrive at a P/E of 15.96. This is indicates the possibility of further stock market gains without worrying about overvaluation. In the current economic, interest rate, and inflation environment a P/E range of 16- 17 is not out of line. Valuation is bullish.

Monetary Indicator: M-2 money supply is starting to show consistent growth of more than 5% nominally and real inflation adjusted growth by more than 3%. Should this develop into a trend it will provide the fuel for further GDP growth. The FOMC continues to hold short term rates at 5.25%. Their biggest stated concern is inflation stubbornly just above the comfort zone. I don’t think they have a reason to move rates in either direction for now. I have been rating this indicator as neutral and will continue to for now.

Title: LTSMTM UPDATE April 1, 2007 Author: Steve Thompson (with editorial comments "EC" by Kirk Lindstrom) Discuss this in our Bob Brinker Free Discussion Forum.at facebook's "Investing for the Long Term" Request Invitation to facebook discussion group. Introduction SteveT: As we begin the second Quarter of 2007 we find the S&P 500 made a very slight gain since the end of 2006. At one point we were up nearly 3% for the Quarter followed by a quick drop to down more than 3%. I believe both of these spikes were triggered by over emphasis on the news of the day. Much of this is driven by short term traders trying to scalp out a few percent as an opportunity arises. The long term prospects as far as I am concerned still look favorable. As I see it the two main fret factors for persistent inflation are energy prices and housing cost. EC: Charts for DJIA - S&P500 - NASDAQ - Russell 2000 SteveT: I know Bob Brinker in the past has said higher energy prices are not inflationary but a drag on economic growth. I believe he is partially wrong on that. While it is true Joe six pack may trim spending in other areas to pay for $3.00 plus gasoline I believe the effect is minor. The real bite in the pocketbook from high energy comes as it trickles through increased costs of all the essential items we buy frequently. It is difficult to think of an item we purchase that doesn’t require energy to make or ship to the shelf. It seems many of the items I buy keep ticking up each time I go to the store. At some point these cumulative increased costs could restrain my spending for luxury items but we’re not there yet. EC: Charts for Crude Oil prices SteveT: Another item that worries me is the effect of rent equivalents in the Consumer Price Index. As many folks find themselves in the position of leaving homes with exotic mortgages they can no longer afford payments, this could increase demand for rentals. Let’s dive in and take a look at how Bob Brinker maybe interpreting the data. Valuation Indicator: The S&P 500 closed March 30 at 1420.86 and using Bob’s 2007 estimate of $89 we arrive at a P/E of 15.96. This is indicates the possibility of further stock market gains without worrying about overvaluation. In the current economic, interest rate, and inflation environment a P/E range of 16- 17 is not out of line. Valuation is bullish. Monetary Indicator: M-2 money supply is starting to show consistent growth of more than 5% nominally and real inflation adjusted growth by more than 3%. Should this develop into a trend it will provide the fuel for further GDP growth. The FOMC continues to hold short term rates at 5.25%. Their biggest stated concern is inflation stubbornly just above the comfort zone. I don’t think they have a reason to move rates in either direction for now. I have been rating this indicator as neutral and will continue to for now.

(LTSMTM UPDATE Continued) Economic Cycle Indicator: The 4^th Quarter 2006 final GDP is 2.5%. Growth for all of 2006 came in at 3.3%. Certainly nothing to lose sleep over, but some do. The worry is weak housing will dash consumer spending and since consumers account for the vast majority of economic activity, eventually the entire economy will slow. The latest report on consumer spending isn’t showing much hesitation. The latest data reveals incomes, spending, and construction all up. All these data points move up and down quickly but for now the economy still looks strong enough to weather a storm. I rate this one bullish. EC: ECRI, the Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index (WLI) was up to 140.6 in the week to March 23 from a downwardly revised 140.1 in the prior week. "With WLI growth rising for three straight weeks, and well above last summer's low, U.S. growth prospects remain resilient," said Lakshman Achuthan, managing director at ECRI. ECRI has been clear they don't predict a recession in the months ahead. You can ask questions of Lakshman Achuthan at his discussion forum here. Sentiment Indicator: Investors Intelligence is showing 48.4% bullish, 24.5% bearish, and 24.1% correction. This yields a ratio of bulls/(bulls + bears) of 63.77% and a four week average of 62.57. Both figures are not an area of concern. The 10 day Put/call ratio is still displaying plenty of bearishness at 1.04. All the sentiment sub indicators have gotten more bullish since the correction lows of early March. This is a signal of just how well these indicators can help identify favorable times to buy or rebalance your equity positions. For now I rate this contrarian indicator as bullish. EC: I agree with Steve. I cover these indicators and several others in my newsletter. These charts were all saying "take profits" in late 2006 and early 2007 and now they are saying "buy." See: Chart: Investors Intelligence Survey Data for 03/24/07 Charts of AAII bull - bear index tor 03/24/07 Chart: ISE Sentiment Index for 03/24/07 Charts of State Street Investor Confidence Index - 03/20/07 Charts of Put Call Ratio (CPC) for 03/23/07 Conclusion: With three bullish and one neutral indicator I see no reason to make any asset allocation changes. As always monitoring is indicated.
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EC: I agree with Steve and believe Bob is still bullish.


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