This week's Hussman post captures the bear case very bluntly;
If the parents or the children of Wall Street analysts were to ask for wise investment advice, would the first thought of these analysts really be to encourage stock purchases at a multi-year market high, in a long-uncorrected and strenuously overbought advance, at a multiple of over 18 times earnings on unusually wide profit margins, with wages and unit labor costs rising faster than inflation, while interest rates are rising, bullish sentiment is unusually high, and corporate insiders are selling heavily? Would the potential for further gains in that environment exceed next inevitable correction by an amount that would make the net gains worth the risk? Would they encourage using trend-following systems in an overbought market, even though a decline to simple moving averages already implies substantial losses?
That is enough to make you swear off stocks forever but don't.
31 comments:
The bears always seem so much more literate than the bulls. They express themselves so well. Compare Hussman, Ritzholtz, Maudlin, Faber, Abelson, with say, Cramer and Kudlow.
Although personally, I prefer gross materialism to genteel poverty.
OG
OG, this point is very important and comes up in many places. The bear case always sound more plausible and of course is wrng most of the time but I care more about it than what K&C ahve to say
Ditto OG.
It appears to my untrained eye, that there are two things (one technical and one fundamental) at work here that the "bears" are gnawing on. (1) (Technical) Last year there was an expectation of a correction that did not materialize; however, not is is felt that it has merely been deferred. So there is this "cycle" shadow that for many is the Damocles sword ready to fall. (2) (Fundamental) There's an expectation that the faltering of the housing and auto sectors (peppered with a savings rate and household debt issue, but I have some issues with how those are counted) ought to be percolating through the numbers (employment, consumer spending)more than they should; according there is an underlying incredulity over the consistent strength reflected.
Until there is the expected correction--and perhaps it does not materialize--these arguments will continue, if not amplify.
I do think that Hussman makes a good point though that one has to look at returns through the peak and a trough--for that is the true measure of risk adjusted returns, is it not?
Didn't we have a correction last year in the May/June timeframe? The Naz was down 10%+. Emerging markets, metals, cyclicals, all those guys got bombed.
I'm in the odd position of being a permabear on the US economy but owning a lot of stocks.
From May intraday high to June intraday low was -8.1% in the S&P 500. There were also several months before the May high was exceeded.
Is that not a "correction?"
If it was not, than why is Marc Faber calling for a 7 to 13% correction? After all, if 8.1% isn't a correction, it stands to reason that 7% isn't.
So is Dr. Doom being intellectually dishonest? I think so. Bearishness sells better than reasonableness, and reasonability is on the bull side about 3/4 of the time.
Not sure if Bears are necessarily more articulate than Bulls but as my old high school football coach used to tell us over and over there are always more things that can go wrong than go right on any play.
The end game here and now remains positive, real total return over a lifespan. For most that means seeking an appropriate balance between 'greed' and 'fear': maximizing real total return while regulating risk as much as possible.
The issue of false dichotomies and strawman aside (and boy have I seen a lot of idiotic argument lately, even been personally insulted for expressing a bearish sentiment by a poster who wouldn't know me from Adam), Bear arguments tend to be intrinsically of more interest because they:
(a) describe possible scenarios involving loss of capital and that's typically a more serious matter than loss of opportunity for most investors;
(b) frequently include assets or strategies that could profit in that scenario and the notion of making money while others are losing it has a certain appeal;
(c) even where profit may be difficult to come by a way to hedge the risk of a particular scenario may be found at less cost than previously appreciated; and
(d) psychologically people feel loss more than they do comparable gain so avoiding pain is a strong impulse.
That last point is really also a reminder of why the Bull case is important: Some risk must be taken to profit; can't allow fear to cause paralysis.
IMHO prudent investing typically boils down to allocating the bulk of capital to the most probable scenario while allocating some smaller portion to less possible (but still entirely plausible) scenarios. Have to listen carefully to what both bulls and bears say to do that well I think but probably more to bears given the number of things that can go wrong compared to the number that can go right.
And they sure didn't go right for Chicago after the first quarter did they; I wasn't rooting for anyone in particular, just wanted to see a good game (and some good commercials -- Snickers drew a real belly laugh), but really did think the most probable scenario was a victory for those Bears.
great comments, TY.
Leisa, you are touching on something that I have been trying to say (not very well). There are always a slew of things to be bullish on and bearish on so what matters more could just be money flow? Where the short term (six months) is concerned. Maybe anyway.
anon, narrower markets did correct by a lot last spring, yes. But the broader market did not. this point matters to me but it is valid if it does not matter to you.
RW, you hit on a big thing, bahavioral finance. if losses hurt more than gains help (emotionally speaking) than might it follow that bearish commentary is more emotionally comfortable? Not sure jsut a rhetorical.
Re the Superbowl. The Colts seemed like an obvious choice so I went Bears, doh. I have no credibility with this but I had a hunch that Hester would run back the opening kickoff and that Vinatieri would miss that kick but of course given the hurricane they were playing in this was not such a shock.
On the game seriously; I wonder if the Bears would have won if Rexy had played up to his normal mediocrity?
calling market tops and bottoms is a fool's game. The wall st. Analyst are the least qualified to give investment advice, so their parents shouldn't listen to them in any market.
Medium term trends are affected a lot more by liquidity than by fundamentals. The Fed and the oil countries are still pumping liquidity into the markets at torrid pace.
We are merely hitting highs from 6 years ago, so one could easily argue that we are just now getting out of a correction and getting ready for the next leg upwards.
Technicians would not buy an overextended market because the risk reward ratio is not in their favor. However, there are always stocks and sectors bouncing off support levels and having new breakouts.
As long as the trend is up, the prudent thing to do is to invest on the long side, set good stops and manage position size wisely.
p.s. today i got stopped out of my MSFT position after holding for 8 months. so maybe the end is near indeed. :)
Roger, you may have a point WRT bearish sentiment but I suspect it has less to do with comfort than a sense of relief at perceiving a possible danger before actually being in the pickle. Leisa's comment relates to this as well I think: When things have gone reasonably well for awhile there is a tendency to begin looking for the catch, the price that will somehow be exacted.
As far as the game went, I would guess the Bear's strategy developed during practice accentuated the run and physically wearing the Colts down but the weather and the Colt's ability to maintain a higher time-of-possession than expected made that increasingly unworkable. I suspect Rexy would have done better if there had been an alternate plan also developed in practice that continued to accentuate the Bear's strength given less time of possession than anticipated. I'm hardly a football strategist so FWIW
As an aside, if you're a John Cougar Mellencamp fan, be careful how you speak of Rex Grossman because he's from John's home town in Indiana and John was rooting for him ;-)
John P. Hussman rant also is very shrewed marketing. If you are underperforming the markets, how do you still keep investor interested. The simplest way is to externalise the problem and offer psychological reward to the investors.Externalising the problem also keeps the expectations lower and takes away the focus from his poor recent returns or methodology.
It seems as though some gurus have predicted eleven of the past two bear markets.
That's as literate as I am going to get on this post.
Nobody wants to touch the CORRECTION issue. It would point out the obvious flaw in many bears' thesis - that there has indeed been a correction in the markets. From May intraday high to June intraday low was -8.1% in the S&P 500. There were also several months before the May high was exceeded.
Keep in mind that from 12/15/06 to 01/30/07 the S&P 500 build a nice consolidation base to digest its gains.
Low volatility is a hallmark of the markets in this phase of momentum-building, based on monthly PPO indicator since 1950. Current "streak" not so unusual as bears would like to claim.
Cheers!
Models this week:
Timing Model = 1.5
70% long, 30% cash
Global Allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
U.S. Sector Ranks
U.S. Telecommunications 5.0
U.S. Real Estate 4.5
Mid Cap Value 4.0
U.S. Basic Materials 4.0
U.S. Financials 4.0
U.S. Banks 3.5
U.S. Utilities 3.0
International Ranks
MSCI Singapore Index Fund 3
MSCI Sweden Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI Malaysia Index Fund 3
MSCI Hong Kong Index Fund 3
MSCI Mexico Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Spain Index Fund 2
MSCI Germany Index Fund 2
Intl + Style + Asset Class Ranks
MSCI Hong Kong Index 4.0
MSCI Pacific Free ex-Japan Index 4.0
S&P Latin America 40 Index 4.0
FTSE/Xinhua China 25 Index 3.0
Dow Jones Wilshire REIT index 3.0
Silver 2.0
MSCI European Monetary Union Index 2.0
S&P Europe 350 Index 2.0
MSCI Emerging Markets Index 2.0
Sorry for the delay this week. I got back from a "manly" winter campout just before the Superbowl and well...didn't get around to updating my models until today. No interesting developments to report.
ax throwing, beer drinking and fishing with your bare hands?
nice
humor attempt
Long-uncorrected?
This is the obvious flaw in many bears' thesis - that there has indeed been a correction in the markets. From May intraday high to June intraday low was -8.1% in the S&P 500. There were also several months before the May high was exceeded. Keep in mind that from 12/15/06 to 01/30/07 the S&P 500 build a nice consolidation base to digest its gains. A month and a half with zero gains is quite a rest for the markets.
It is intellectually dishonest for Hussman and the other perma-bears to claim the market is overbought and hasn't corrected when indeed it did correct just 7 months ago and just spent six weeks consolidating its gains.
Roger,
I almost didn't recognize you in your coat/tie/white shirt photo. I thought you were a tee shirt kinda guy?
P.S. Keep trying with the humor. It gets better with time and the more you practice.
I have to (half) disagree about the notion that tops and bottoms cannot be called. Tops are impossible to call. I have nothing in my tool kit that would catch a bear, either before or soon after a market inflection point occurs. As for bottoms, bulls are easier to spot, I’ll give you one example. Back in August of 1982, up volume swamped down volume, one day, by 42 to one. The market did very well after that. It’s not all that impossible to come in early after a bull market begins.
As for tops, all I can do is use mental stops on my positions, what else is there?
I agree that it is possible to come in early after a bull market is born. That's not the same as calling a top or a bottom.
It is said that "calling tops and bottoms is a fool's game" and the "trend is your friend" to indicate that you should not take your position BEFORE the correction starts or the bull market is born.
For example, Hussman has been calling a top for a while now. His fund's performance flat-lined while the market went up by roughly 15%. He would've been much riding the market and being diligent on stops.
Same thing after the Nasdaq bubble burst. Lots of people called bottoms on the Nasdaq at 4000, and then 3500, and 3000, and 2500, and 2000 and kept buying and getting burnt. A month or two after the bull in the Nasdaq was reborn it was "easy" to spot for astute investors.
To be fair, i think it is a LOT easier for us, small investors, to wait for the trend to develop that it is for Hussman and other fund managers. Many bloggers seem to believe that any fund (or hedge fund) can see inflection points on the charts and buy and sell on the spot. I personally believe that their size greatly limits their agility. People like me should rely on the charts. Managers like Hussman have to depend on macro and fundamental analysis, and to a lesser extent on the chart. The whole reason the chart exists is because of their footprints.
Hussy has been complaining about valuations for four years now. From Jan '04, "it is very likely that any further gains that do emerge will ultimately be surrendered." What is the three-year gain on the indices? What is the three-year gain on his Strategic Growth Fund? Hmm, his fund trails the indices over the last three years? Sounds like he's still fighting the bear, but the bear is gone. He hasn't been calling for a top for "a while now," he's been calling for a top for years!
He holds $2.8 billion in assets as of his last annual report? That's not a very large fund, compared to the value of stocks exchanged in the market on a quarterly basis. He could easily reposition himself over the course of a few months at most.
Here's a nice collection of his commentary, along with market changes that followed.
http://www.cxoadvisory.com/gurus/Hussman/
My favorite Hussman quote is the "unfavorable market action" from late July '06 through October '06, a period of 100-points gained in the S&P 500.
Another good quote is his valuation of Google at $24 per share.
http://www.hussmanfunds.com/wmc/wmc040823.htm
Aside from the Google gaffe, he is a decent stock-picker. From his annual report, the stocks he's picked have outperformed the S&P 500 in each calendar year since inception. Hussy's problem is that he has no overall sense of market direction and totally missed about four years of bull action! Even though his stocks outperformed in 2003-2006, his persistent hedging while fighting a bear that's vanished has made his overall fund underperform.
If he would get a clue that we're in a bull market, he'd do alright. If he'd have gotten that clue a few years ago, he'd have a heck of a fund track record.
You may find this amusing or just plain odd, I’ve got a Hulbert Financial Digest from 1993, in it Hulbert reviews a newsletter called Hussman Econometrics. Yes, the very same John Hussman of present mutual fund fame.
The Hussman of 14 years ago was advocating the heavy use of margin, his four suggested portfolios had a risk of 240%, 188%, 276% and 285% of the market. And yes, he was dramatically beating the market at that time. I never subscribed to his newsletter, so I don’t know what became of this. He seems to have had a personality change.
he used a lot of options then, was in Barron's all the time. I sopke to him several times when I worked on the Schwab Institutional desk but I am quite certain he would not remember me.
He uses a lot of options now. His primary hedges are puts on the SPX and the RUT, and selling covered calls and buying puts on individual stocks from time to time. About 2-4% of his equity seems to be tied up in options.
Imagine if he'd been bullish on the indices for the last 4 years!
Two dozen comments, and nobody wants a piece of the "correction" argument? I'm not startled.
Hussman says "in a long-uncorrected and strenuously overbought advance" – and yet from May intraday high to June intraday low was -8.1% in the S&P 500. There were also several months before the May high was exceeded. Also, from 12/15/06 to 01/30/07 the S&P 500 build a nice consolidation base to digest its gains.
SO!
Is –8.1% from high to low and months to make a new high a "correction" or not?
If it isn't, why not?
If it is, then is 7 months post that equate to "long-uncorrected?"
Does a six-week period of zero gains make an advance "strenuously overbought?"
Opinions please!
Do the readers here agree or disagree with Hussman's description of this as a "long-uncorrected and strenuously overbought advance"?
Well I, for one, disagree with John Hussman’s assertion that we haven’t had an correction. Indeed, since the bull market began, it’s been punctuated with corrections, it’s been a Swiss cheese, filled with holes, bull market. Better yet, this has been a falling PE market, which is what the good Doctor has been obsessed with for the last 6 or 7 years.
Perhaps Hussman wants to get the market PEs down as low and fast as possible. Why?
Deep down inside, the real Jonnie Hussman is an all out, wild, crazy, go hell for broke, shoot the lights out, stock market PLUNGER!
It’s just that he needs the right conditions, a low PE environment, to get him cranked.
I have owned some Hussman funds (just sold) and they correlate to nothing. they never go up (even when the market corrected) and occasionally drip down. I would rather have my money in cash earning 4.5% and save the 1.2 expense ratio. His fund is basically worthless.
I'm still interested in Roger's opinion – does Hussman's description of a "long-uncorrected and strenuously overbought advance" hold water with you in light of the –8.1% May-June move, months without a new high, and a recent six week consolidation?
It is easier for Hussman to continue to play the bear card rather than admit that he was wrong. I would like to know how Hussman himself is invested. Money where your mouth is...
he has been quite candid since I have been reading him that most (maybe all) of his money is in his funds.
As a small holder of hsgfx I am puzzled by the lackluster performance. Many think him a brilliant investor. Obviously, in recent years this has not been borne out. May be a case of: "too clever by half."
What do people think about these funds now that we're flat for '07?
The thing I return to is imagining how Hussman would have behaved in the late 90s. I assume he would have sat most of it out.
And that's a good thing, although at the time I'm sure he'd be widely considered a moron.
HSTRX has sure performed well this year.
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