March 29, 2012, Current Status of Bob Brinker's Bear Market Indicators

March 29, 2012....Let's review Bob Brinker's 5-Root Causes for a Bear Market.

On Moneytalk in 2010, Bob Brinker explained his 5-root causes of a bear market. In some ways, they are similar to the 4 components of his Marketimer timing model. We know the main components in Bob's timing model because he explained them at a live appearance in San Jose for a KGO Leukemiathon.

 The Marketimer timing model consists of four main components: Economic Outlook; Monetary Policy; Equity Valuation;  Investor Sentiment.

Bob's 5-root causes of a bear market as of March 2012: 

1. Tight Money: Bob talks about the Federal Reserves' latest report that said: "The committee stated that it expects to maintain a highly accommodative stance for monetary policy."  The FOMC has committed to keeping interest rates low for the next three years.

2. Rising Rates: Brinker thinks it will happen eventually, but doesn't see it in the near future, and it is not happening now.

3. High Inflation: Even though gasoline prices and fuel oil prices have increased, year-over-year,  the CPI now stands at 2.9%, which Bob considers low inflation --the high unemployment rate is a factor. Core inflation (which is minus food and energy) remains tame.  The personal consumption expenditure (PCE) shows year-over-year inflation of just 1.8% and Bob expects that figure to remain close to or below two percent this year.

4. Rapid Growth: Not there....Bob expects real gross domestic product (GDP) growth in 2012 to stay within the range of 1.5% to 2.5% --  slightly more conservative than the Federal Reserve forecast.

5. Over-Valuation: Bob does not see overvaluation now based on company earnings. In the March 2012 Marketimer, Bob wrote:  "Applying our 14 to 14.5 price/earnings multiple range to our $103 operating earnings estimate for the S&P 500 Index, we are projecting a rise in the S&P 500 Index into the mid-to-upper 1400s within the next 12 months."

Conclusion: All the root causes for a bear market are still in hibernation. :)

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Bob Brinker's Five Root Causes of a Bear Market

April 30, 2011....According to Bob Brinker, there are 5 root causes of a bear market:

1. Tight Money
2. Rising Rates
3. High Inflation
4. Rapid Growth
5. Over Valuation

A year ago on Moneytalk, Brinker reviewed these items and decided that they were all negative. Does he feel the same way now? Let's compare what he said then with what he is saying now on Moneytalk.

1. Tight Money

May 2010, Brinker said: "First one of the root causes of a bear market is tight money. What is tight money. That is when the Federal Reserve pulls in their horns, takes away the punch bowl, restricts the growth of the money supply. And money is harder to get, and as a result money price of money goes up....Do we have that now? No. Do we have the prospect of having that now? No. We have easy money now and the Federal Reserve is clearly on an easy money track.....especially with what is going on in Europe."

April 17, 2011, Brinker said: "Well what's going to happen at the end of June when QE2 expires is that the Federal Reserve will no longer be buying 75 billion dollars a month in Treasury securities...That means there is less demand by that 75 billion amount for Treasury securities once QE2 expires. That means that as long as the Treasury continues to offer these securities at a very high rate, because of our trillion dollar plus deficits - way over a trillion this year - closer to a trillion and a half, 1.6 trillion - mind boggling numbers.....That Treasury paper will be available on the market so it will be available to the lowest bidder....The Treasury takes the lowest it can get......I would say that the risk is that you could see 50 to 100 basis points in the Treasury market when the Treasury has to make these offerings without the help of the Federal Reserve in there buying on the Quantitative Easing program.....And I'm comfortable that that is the risk....once we get into July.....Right now, I don't expect a QE3...."

Honey EC: So he thinks that less money availability after the end of QE2 will only raise rates 50 to 100 basis points. If correct, no apparent "tight money" there.

2. Rising Rates

May 2010, Brinker said: "What's another root cause of a bear market? No question, rising interest rates. I'm not talking about the federal funds rate going from 1 to 2. I'm talking about a meaningful rise in interest rates.....When we look at the rates today, they are low, low, low. How low are they? Well, 3-month Treasury Bills are 15 basis points. That's about 1/7 of 1% a year. Six-month Bills are 21% basis points....One-year Treasuries are about 1/3 of 1% annual. Two-year Treasuries about 3/4 of 1% annual. Five-year Treasuries at 2%. Ten-year Treasury Bonds at 3 1/4. Thirty-year Bonds at 4.1........Rising rates are not a problem as we look at the market place right now."

April 2011, Brinker said: "Bond market is starting to act a little better and that's of course because people are wondering whether there will be some austerity measures in the US. Any austerity measures coming out of Washington would slow down economic growth. Less money in circulation in terms of fiscal stimulus.....No question that would have a restraining impact on the US economy. Investors are starting to look at that and they know that if the Federal Government starts to pull back, and there's a lot of pressure on them now with this S&P downgrade....and that's a good thing.

Well if we have any kind of austerity steps in the budget that reduces the growth rate of the economy, it also reduces inflationary pressures. So bond investors are liking what they see when it comes to the subject of the possibility of reducing fiscal stimulus and the possibility of moving away from the risk of inflating the economy. So all of this is going to be something that investors will focus on."

Honey EC: So based on what Brinker said, it looks like we can conclude that there is no indication of major rising interest rates.

3. High Inflation

May 2010, Brinker said: "What's another root cause of a bear market, a decline in excess of 20% in the S&P 500......No question about it, Hyperinflation, rising inflation. Do we have that? No. I know there are a lot of people out predicting it, but they've been wrong. Right now we have a year-over-year Consumer Price Index increase of 2.2. And better than that, the year-over-year core Consumer Price Index is one of the lowest of all times. It's 0.9.....excluding food and energy......So if you've been betting on inflation, well, that horse fell somewhere down a back stretch. I hope it's okay. ......We don't have an inflation problem right now."

April 17, 2011, Brinker said: "Inflation is really low, the core rate 1/10 of 1%, up for the month of March. And year-over-year the core rate up 1.2, and that is what the Federal Reserve watches. They want to keep the core rate below 2%. So far they are getting their wish at 1.2 on the CPI."

Honey EC: Brinker refuses to consider rising oil prices inflationary, and when callers tell him that food prices are rising, he poo-poos it. Nope, no inflation there according to Brinker.

4. Rapid Growth

May 2010, Brinker said: "What's another cause of a bear market. At the root, it's rapid economic growth and a boom in the economy. The economy is roaring ahead. Do we have that? Not on your life. Not even close......Some people are worried about a double dip....."

April 2011, Brinker comments paraphrased: ECONOMIC RECOVERY....Is happening without the help of the real estate market...The rate of recovery is modest....The 4th quarter annualized rate of real Gross Domestic Product was up at a rate of 3.1%....

Honey EC: With the jobless rate still so high, I think Brinker may have been exaggerating a bit when he said the recovery is "modest." Slow might be a better description of it.

5. Over-valuation

May 2010, Brinker said: "And another root cause of a bear market is over-valuation. When stock prices are so high relative to valuations they're on the moon like they were in January of 2000. Well, not true. We don't have over-valuation right now. We have good valuation right now."

April 24, 2011, (When a caller asked if now was the time to sell stocks) Brinker said: "No.....Based on the work that I do, using 2011 operating earning estimates that I have a high level of confidence in at this point, after all it's already the month of April......I would say the S&P 500 is trading below its historic average multiple.....I use estimates for 2011....and I'm comfortable using those estimates."

Honey EC: So it doesn't look like Brinker has made any changes in his outlook on a possible bear market based on his 5 root causes. And:

April 2011, Marketimer, Bob Brinker said: "We expect the S&P 500 Index to make additional progress into the low-to-mid 1400's range within the next 12 months based on our earnings and P/E multiple expectations. The potential for gains beyond that range will be a function of the sustainability of the economic recovery and the ability of the Federal Reserve to manage monetary policy."

Nope, no bears lurking there. Just a word to the wise.... be aware that he didn't recognize the last bear in 2008 until it had consumed a large portion of his fully invested portfolios.