On the surface, the U.S. economy is gradually recovering. Based on mean reversion to potential GDP (which generally occurs over a 4-year horizon absent an intervening recession), we would expect GDP growth over the coming 4-year period to average 3.8%, with average monthly employment growth of 200,000 jobs. This would be my "benchmark" expectation if the U.S. and international banking systems were "clean." However, my concern is that the surface U.S. recovery is built over a foundation that is vulnerable to further strains. If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced. Unfortunately, we have built our house on a ledge of ice.And he is expecting sub-par return from the stock market:
I continue to view the stock market as richly valued, and priced to achieve returns of less than 5% at every horizon out to a decade. The expected returns at the shorter horizons are more volatile, of course, than those at longer horizons, and it is there that a broader range of "Market Climate" classifications can be helpful. We'll modestly alter our exposure to market fluctuations in response to modest changes in conditions, but of course, we would prefer a large shift in valuations which would allow us to accept an unhedged exposure.The mutual fund manager claimed that they have sharpened their tools in hedging the risk but would not go in details:
Our investment approach is fairly straightforward - accept proportionately greater exposure to risk when the expected return per unit of risk is high, and proportionately reduce exposure to risk when the expected return per unit of risk is low. The details are in the implementation, and that is where we focus most of our research. Over the past two years, most of these efforts have focused on the proper use of multiple data sets, on broadening the range of classifications that we define as distinct "Market Climates," and on enhancing the "robustness" of these classifications across subsets of the data.
Without going into technical details that would be useful only to competitors, the basic outcome of this research is that we continue to refine the Market Climates we identify, and have developed additional methods to make robust estimates of their associated return/risk profiles. I expect that you'll observe the first fruit of this research in the form of modest, transitory exposures to market fluctuations on a more frequent basis. This isn't a major change - large, persistent exposures will still await some combination of significantly improved valuations, downward yield pressures, and economic clarity - but we should be able to better exploit our latitude for modest variations in our market exposure as conditions vary over time. As always, we retain a strong emphasis on risk management, with the objective of outperforming our benchmarks with smaller periodic drawdowns than a passive investment strategy.
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Here are the stocks Hussman sold during the past two quarters:
No. 1: Panera Bread Company (PNRA), Weightings: 1.85% - 1,500,000 Shares
John Hussman owns 1,500,000 shares of PNRA, valued as $133 million as of Sep. 30, 2010, which accounts for 1.85% of his equity portfolio. John Hussman reduced his positions in the Jun. 30, 2010 quarter by 14.03%, again in the Sep. 30, 2010 quarter by 9.59%.
Panera Bread Company operates a retail bakery-cafe business and franchising business under the concept names Panera Bread Company and Saint Louis Bread Company. Panera Bread Company has a market cap of $3.12 billion; its shares were traded at around $100.25 with a P/E ratio of 29.31 and P/S ratio of 2.3. Panera Bread Company had an annual average earning growth of 26.3% over the past 10 years. GuruFocus rated Panera Bread Company the business predictability rank of 4-star.
No. 2: Chipotle Mexican Grill Inc. (CMG), Weightings: 0.84% - 350,000 Shares
John Hussman owns 350,000 shares of CMG, valued as $60 million as of Sep. 30, 2010, which accounts for 0.84% of his equity portfolio. John Hussman reduced his positions in the Jun. 30, 2010 quarter by 39.49%, again in the Sep. 30, 2010 quarter by 12.5%.
Chipotle offers a focused menu of burritos, tacos, burrito bols and salads made from fresh, high-quality raw ingredients, prepared using classic cooking methods and served in a distinctive atmosphere. Chipotle Mexican Grill Inc. has a market cap of $7.95 billion; its shares were traded at around $255.65 with a P/E ratio of 49.54 and P/S ratio of 5.24. Chipotle Mexican Grill Inc. had an annual average earning growth of 35.6% over the past 5 years.
No. 3: FactSet Research Systems Inc. (FDS), Weightings: 0.43% - 379,000 Shares
John Hussman owns 379,000 shares of FDS, valued as $31 million as of Sep. 30, 2010, which accounts for 0.43% of his equity portfolio. John Hussman reduced his positions in the Jun. 30, 2010 quarter by 63.12%, again in the Sep. 30, 2010 quarter by 17.79%.
FactSet Research Systems Inc. supplies global economic and financial data to analysts, investment bankers and other financial professionals. Factset Research Systems Inc. has a market cap of $4.19 billion; its shares were traded at around $90.29 with a P/E ratio of 29.22 and P/S ratio of 6.53. The dividend yield of Factset Research Systems Inc. stocks is 1.02%. Factset Research Systems Inc. had an annual average earning growth of 19.4% over the past 10 years. GuruFocus rated Factset Research Systems Inc. the business predictability rank of 5-star.
No. 4: DresserRand Group Inc. (DRC), Weightings: 0.34% - 667,000 Shares
John Hussman owns 667,000 shares of DRC, valued as $25 million as of Sep. 30, 2010, which accounts for 0.34% of his equity portfolio. John Hussman reduced his positions in the Jun. 30, 2010 quarter by 20%, again in the Sep. 30, 2010 quarter by 33.3%.
Dresser-Rand Group is among the largest global suppliers of rotating equipment solutions to the worldwide oil, gas, petrochemical and process industries. Dresserrand Group Inc. has a market cap of $3.09 billion; its shares were traded at around $38.22 with a P/E ratio of 23.02 and P/S ratio of 1.35. Dresserrand Group Inc. had an annual average earning growth of 35.4% over the past 5 years.
No. 5: Under Armour Inc. (UA), Weightings: 0.32% - 507,000 Shares
John Hussman owns 507,000 shares of UA, valued as $23 million as of Sep. 30, 2010, which accounts for 0.32% of his equity portfolio. John Hussman reduced his positions in the Jun. 30, 2010 quarter by 23.96%, again in the Sep. 30, 2010 quarter by 7.4%.
Under Armour is a developer, marketer and distributor of branded performance products for men, women and youth. Under Armour Inc. has a market cap of $2.88 billion; its shares were traded at around $56.5 with a P/E ratio of 47.48 and P/S ratio of 3.36. Under Armour Inc. had an annual average earning growth of 7.4% over the past 5 years.
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