Joey's Letter to Bob Brinker and Mark Hulbert

Here is Joey's letter to Bob brinker, his staff and Mark Hulbert. [Please note that Bob Brinker's Marketimer is no longer rated in the top-5 performers in Hulbert Financial Digest over any time period, in any category, even though Hulbert has never accounted for the QQQQ-trade that Brinker made in October 2000 that used model portfolio cash reserves .]

joey said...

What follows is a letter that I sent Bob Brinker and his staff at help@marketimer.com:

Dear Bob Brinker and staff:



Below is a summary of Bob Brinker's calls and analysis of market trends from 1986 to current times. I am sending a copy of this research of Bob's market calls to "Hulbert Financial Digest", which rates newsletter writers. To be fair to you and your staff, I am enclosing a copy of my research report on you so that you can edit and correct any factual mistakes and argue for different conclusions.



If you agree with me and the report stands as is, then I am certain that you will be rated in the bottom five of the over 180 newsletters in Hulbert's database for any 1year, 5 year, 10 year, 15 year, and 20 year period of time. So, if I were you, I would try to refute and edit any provable facts that you can. I do not think you can. But to be fair, I must give you this last chance.



You may have seen a preliminary draft. I have edited and expanded that draft to my final report, pending your input and comments:




April 2, 2009

Market Tops and Exogenous Events and Unacceptable Risks from New Financial Products escape Bob Brinker (Financial Newsletter Writer and Prognosticator):

I have been following Bob Brinker since 1986. Some brief observations:

1) He has a more difficult time calling tops than bottoms in the market. He missed the 1987 (October 19) crash and short bear market. He compounded the error by waiting too long to get back into the market.

2) Then he missed the 1990 bear market. But he was correctly bullish for the rest of the 1990’s.

3) He partially called the 2000 bear market by going to 60% to cash in January and 65% to cash by late summer of 2000. But he largely damaged that great call by erroneously calling a bear market rally with up to half the cash in QQQQ in October, 2000. This terrible QQQQ buy call was magnified by the absence of any guidance with respect to “stop-loss” advice. So he let a buy in the mid 70’s go to less than 25 with up to half the cash in the Nasdaq 100 ETF.

4) He correctly called a “buy” and bull market start in March, 2003.

5) But he missed the “mother of all bear” markets by not selling in October, 2007 at (S&P 500) 1565. He compounded that bad call with several bad subsequent “buy calls” (“gift horses”) all the way from S&P in the low 1300’s down to S&P in the low 800’s. The S&P hit a closing low of 676 on March 9, 2009. To be succinct and cogent, he identified several false bottoms or entry points for new money. These mistakes cause two major problems for his followers. They not only have lost over half of their money since the high’s in the fall of 2007, but they have no new money left to take advantage of the next bull cycle whenever a true bottom to this viscous bear market emerges or is truly identifiable. Bob not only cannot find the top; he cannot find the bottom. As Bob would say, what an “unmitigated disaster!”

6) He relies too much on technical analysis and fundamental analysis (including valuation) without looking at the big picture. Despite living in Las Vegas for the last several years where there was a serious and accentuated housing bubble, he never saw it or ignored it as a problem for equities. Despite having worked for banks, he was clueless to what was going on with mortgages and subprime mortgages and refinancing without honest backup (documentation). He was clueless with respect to risk in the derivative markets (credit default swaps, etc). He was clueless with respect to the extensive use of leveraging and its ramifications. He was clueless with respect to the financial engineering of new and risky financial products that could destroy the system. He was clueless to the lack of regulation and oversight. He is too far removed from what is going on in Wall Street (both with respect to geography and age).

7) But what he is mostly clueless of is as follows: No one can predict exogenous events that can destroy market tops (airplanes flying into the twin towers on 9-11-2001; malfeasance at Enron and several other publicly traded companies in 2002; the housing bubble and credit problems starting in 2007 and accelerating with bank failures and bailouts in 2008). By definition, exogenous events arise out of nowhere and are unpredictable until it is too late. For example, what if Israel bombs Iran tonight? The markets would sell off—especially if said bombing triggered a bigger Mideast War. This last example would be a geo-political event that is also an exogenous event (unpredictable).

8) Bob also makes the following mistake: He wants to get you out of the market at the very top or within 3% of the top. But he will not tell you to sell after a 15 to 25% correction when the market may correct all the way down to 55-60%. Out of stubbornness or ignorance, he would not admit a mistake in early September, 2008 that would have saved him and his followers a majority of the pain from an accelerated deterioration of the markets in the fall of 2008. Bob is all or nothing. Either sell at the top into strength or do not sell at all.

9) He correctly analyzed the history of secular Bull and secular Bear markets in 2000. But curiously and without justification, he incorrectly called the end of the secular Bear market in 2006. If he had stuck with the original theory, he would have known that in a Secular Bear Market the next cyclical bull market (3-2003 to 10-2007) within the Secular Bear Market (3-2000 to unknown year approximately 17 years after 2000) would not exceed the prior secular bull top (S&P 1530 in 3-2000) by more than 3 to 7%. So when the S&P hit 1565 in October, 2007; he should have called a “sell” because according to the theory---there was not much upside left with a lot of risk to the downside. In short, the risk/reward ratio was not on his side to stay fully invested after October, 2007. Moreover, there was another important reason to sell off at least a portion of the equities (rebalancing between stocks and fixed income assets) by the fall of 2007. By then, the cyclical bull had gotten a little long in the tooth. In short, the cyclical bull was already five years old----longer than the average bull cycle. A 6th year would be pushing the envelope---despite 2008 being a presidential election year. The last caveat is based on historical data that tells us that there have been no bear markets in presidential election years since World War II. But past patterns do not always repeat. I think that counting on a 6th year of a bull run is folly. Remember that Bulls make money; Bears make money; Pigs (do not be too greedy) get slaughtered.

10) Bob compounds his errors by not admitting to them. He also does not explain his thinking and what went wrong in his analysis. In short, he never discusses where his timing model went wrong. What variables did he miss? Has he corrected his timing model for future calls based on learning from mistakes? My theory is that Bob can correctly call market tops if the tops are based on over valuation (for example, S&P 500 P/E’s at roughly 30 in early 2000). But he cannot call market tops when there are exogenous events in play.

11) Perhaps he should do the following: Do asset allocation and rebalance once every year or two and admit that he cannot call market direction, especially at the top.

The bottom line is that the Nobel Prize winning Modern Portfolio Theory (Asset Allocation and periodic rebalancing) still works after so many years. Your Asset percentages will tell you if you need to trim some excesses to manage your risk tolerance.

A good book that Bob should read is “Buckets of Money” by Raymond J. Lucia, CFP.

Finally, I must say the following to Bob: “Thank you for what you have done for me for the last 23 years. You taught me to think for myself and not rely on any self-proclaimed guru including yourself to be able to manage my own money. You also preach that it is prudent and wise to reduce investment expenses. The first expense to reduce or eliminate is the fee to subscribe to your newsletter. Even if one is entertained by your bizarre prognostications, several libraries still carry it for free; many web sites summarize your monthly pontifications in the newsletter; and many web sites summarize your weekend radio shows and show us how to pod-cast the shows for free. So, please retire or find a new occupation in which you do no harm (because of you, many blind followers will not be able to chart the waters of financial independence) and in which you could actually be good at. Remember that in a Bear market (as when the police go to the house of ill-repute), everyone goes including the piano player. You have had a great and long run; it is time to go."



Addendum:

I already put $6,000 of new money in on March 16 into the Schwab 1000 fund and am up over $700 in two weeks. I have some limit buy orders on EEM, XLF, CSCO if the market sells off more and retests the March 9 lows. I suspect that if we retest those lows, the retest would occur by the end of April or May. That is when some more bad news could come in as a result of the completion and fall-out of "stress-testing" of the big banks. There could be more bank failures. Do not forget any negative fall-out as a result of any auto company bankruptcies. But long term (1-10 years), I am positive and optimistic.

Sincerely,

Joseph J. IXXXX

April 2, 2009 8:00 PM

[Honeybee here: Joey's original letter is posted here (LINK).

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