April 30, 2007: Steve Thompson's Update on Bob Brinker's Long Term Stock Market Timing Model

Title: LTSMTM UPDATE    April 30, 7

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

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SteveT:   Stock market gains for the month of April have been phenomenal.

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

SteveT:   It would not be reasonable to predict this strength to be without end. Despite a weaker than expected GDP report the stock market reaction to this disappointing news was better than many would have expected. What could this bullishness be telling us? I believe the stock market is telling us in six to nine months the economy will have transitioned from waning to resuming strong upward growth. While housing activity is weak consumer spending has remained firm. Home builders are very wary but their inability to see the housing correction gives me cause to believe they are being overly pessimistic about the inevitable recovery. When housing takes off again it should add around one percent to GDP along with revisions we might see GDP approach trend later this year. The majority of the economy is solid while housing weakness persists. The positive durable goods report this week is encouraging.

EC: The first estimate for first quarter US GDP came in at 1.3%. This number is lower than what we'd like due to the slowdown in housing. Outside of housing, the economy is doing great. Many thought we would be in a recession with the Fed Funds rate at 5.25% but the consumer still finds money to spend.

I agree with Steve's assessment of the economy and what the market is telling us. It also agrees what ECRI has predicted. ECRI's WLI predicted last year that the economy but not enter a recession. We are now seeing this. ECRI today predicts that the housing market has bottomed AND that the economic growth cycle has bottomed or is bottoming and will be strong in the quarters ahead.

SteveT: For now I expect the Federal Reserve to remain on hold. Until we see signs of further economic weakness or joblessness above five percent they really have no reason to adjust short term rates. They are going to be watching for signs of inflation. In this area no doubt uncertainty exists. I suspect the FED is watching to see if competitive forces will correct their inflation problem. Core inflation is and has been above their comfort zone but on the other hand it is not running rampant. Now let’s take a peak at how Bob Brinker maybe interpreting his stock market timing model.

Valuation Indicator : As of the April 27 close the S&P 500 is at 1494.07. Using Bob’s 2007 earnings estimate of $89 we have a P/E of 16.78. This is approaching the high end of Bob’s stated comfort range for out current inflation and interest rate situation. We are still not overvalued. If we use the FED model it suggests a P/E of 21 would be reasonable. No valuation concerns anyway you slice it so I rate Valuation bullish.


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Title: LTSMTM UPDATE April 30, 7 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. SteveT: Stock market gains for the month of April have been phenomenal. EC: Charts for DJIA - S&P500 - NASDAQ - Russell 2000 SteveT: It would not be reasonable to predict this strength to be without end. Despite a weaker than expected GDP report the stock market reaction to this disappointing news was better than many would have expected. What could this bullishness be telling us? I believe the stock market is telling us in six to nine months the economy will have transitioned from waning to resuming strong upward growth. While housing activity is weak consumer spending has remained firm. Home builders are very wary but their inability to see the housing correction gives me cause to believe they are being overly pessimistic about the inevitable recovery. When housing takes off again it should add around one percent to GDP along with revisions we might see GDP approach trend later this year. The majority of the economy is solid while housing weakness persists. The positive durable goods report this week is encouraging. EC: The first estimate for first quarter US GDP came in at 1.3%. This number is lower than what we'd like due to the slowdown in housing. Outside of housing, the economy is doing great. Many thought we would be in a recession with the Fed Funds rate at 5.25% but the consumer still finds money to spend. I agree with Steve's assessment of the economy and what the market is telling us. It also agrees what ECRI has predicted. ECRI's WLI predicted last year that the economy but not enter a recession. We are now seeing this. ECRI today predicts that the housing market has bottomed AND that the economic growth cycle has bottomed or is bottoming and will be strong in the quarters ahead. SteveT: For now I expect the Federal Reserve to remain on hold. Until we see signs of further economic weakness or joblessness above five percent they really have no reason to adjust short term rates. They are going to be watching for signs of inflation. In this area no doubt uncertainty exists. I suspect the FED is watching to see if competitive forces will correct their inflation problem. Core inflation is and has been above their comfort zone but on the other hand it is not running rampant. Now let’s take a peak at how Bob Brinker maybe interpreting his stock market timing model. Valuation Indicator : As of the April 27 close the S&P 500 is at 1494.07. Using Bob’s 2007 earnings estimate of $89 we have a P/E of 16.78. This is approaching the high end of Bob’s stated comfort range for out current inflation and interest rate situation. We are still not overvalued. If we use the FED model it suggests a P/E of 21 would be reasonable. No valuation concerns anyway you slice it so I rate Valuation bullish.

(LTSMTM UPDATE Continued) SteveT: Continues: Monetary Indicator: Little has changed in the last month in this regard. The next FOMC meeting is May 9^th and no one is expecting a change in FED Funds rate. Another tool at the disposal of the FED is money supply. I am beginning to see evidence of some fine tuning by gradually increasing M-2 money supply. That has been bumping up slowly to a nominal rate in excess of 5% year over year growth most weeks since mid February. Subtracting the current 2.8% CPI is giving us a real growth rate in the threes but this could enable the economy to keep chugging along, buying time until housing rebounds. When this happens money supply can more quickly be adjusted to stave off inflation than interest rate adjustments. Money supply tweaks are seldom covered in the financial press, it is sort of the FED stealth tool. I continue to rate Monetary as neutral. Economic Cycle Indictor: The advanced first quarter GDP report caught many of us off guard. I am encouraged by the lack of reaction by both the Stock and Bond markets. This number will get a revision May 31st and a final reading June 28^th. Digging into the advance report reveals exports and slower government spending contributed to the sluggishness. It also revealed business investment gained from the previous quarter. The Core PCE deflator came in unchanged at 2.2%. In this area flat is better than an increase. I am greatly encouraged that ECRI is out in front of the pessimistic crowd in saying the economy is resilient enough to endure until housing firms later this year. They also see capital spending and employment picking up prior to year end. I believe economic growth is about to stop decelerating and begin to turn around. This should bolster future earnings. I rate the economy as bullish. EC: On April 27th, ECRI, the Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index (WLI) for the week ended April 20th increased to 141.6 in the week ended April 20 from 140.4 in the prior week. "With WLI growth recovering to an 11-week high, U.S. economic growth prospects have begun to improve once again" said Melinda Hubman, research associate at ECRI. . ECRI has been clear they don't predict a recession in the months ahead. Lakshman Achuthan , managing director at ECRI, answers questions about the economy and ECRI's indicators of at his discussion forum here. SteveT: Sentiment Indicator: Investors Intelligence is showing 51.1% bullish, 26.1% bearish, and 22.8% correction. This yields a ratio of bulls/(bulls + bears) of 66.19%. The four week moving average is 66.07%. We are within the normal range of an ongoing bull market. The 10-day Put/Call ratio is a healthy .90, while the 60-day average is a respectable 1.05. Keep in mind Sentiment is a contrarian indicator and can be among the most volatile so it warrants close monitoring. Tracking this closely can be very helpful in choosing times to rebalance and take profits in a portfolio. For now I rate Sentiment as Bullish. In conclusion little has changed in the past month with Bob Brinker’s model despite all that is reported in the media. Day to day news gyrations often cancel each other out and amount to a net status quo. No question about it the economy has been decelerating but I am hopeful the tide has turned and the U.S economy will lead the World in sustainable growth into 2008. With three main indicators bullish and one neutral no changes are anticipated in Bob’s stock market outlook.
EC: I agree with Steve and believe Bob is still bullish. When people call the show and try to ask him about his "secular bear market call" he usually avoids the question and talks about how he has been correct to be fully invested since March 2003. Given how he has said in the past his model doesn't predict final tops or bottoms in advance, the whole idea of a secular bear might have been crafted to get you to keep coming back year after year. Discuss Steve's Interpretation of Bob Brinker's Stock Market Timing Model in our Bob Brinker Free Discussion Forum.at facebook's "Investing for the Long Term"