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Hussman Weekly: A Reluctant Bear's Guide to the Universe

February 04, 2013
GuruFocus

GuruFocus

370 followers
Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history:
  1. S&P 500 Index overvalued, with the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) greater than 18. The present multiple is actually 22.6.
  2. S&P 500 Index overbought, with the index more than 7% above its 52-week smoothing, at least 50% above its 4-year low, and within 3% of its upper Bollinger bands (2 standard deviations above the 20-period moving average) at daily, weekly, and monthly resolutions. Presently, the S&P 500 is either at or slightly through each of those bands.
  3. Investor sentiment overbullish (Investors Intelligence), with the 2-week average of advisory bulls greater than 52% and bearishness below 28%. The most recent weekly figures were 54.3% vs. 22.3%. The sentiment figures we use for 1929 are imputed using the extent and volatility of prior market movements, which explains a significant amount of variation in investor sentiment over time.
  4. Yields rising, with the 10-year Treasury yield higher than 6 months earlier.
The blue bars in the chart below identify historical points since 1970 corresponding to these conditions.

wmc130204a.gif

I can’t stress enough the importance of seeing the larger picture here – it would have been easy to miss the forest and get lost in the weeds and trees of daily and weekly market advances at each point identified in the chart above. Pursuing short-term returns in those environments would have been a mistake, because the initial losses typically came in the form of vertical “air pockets.”

I’m keenly aware that the reflexive answer to these concerns is to disregard the messenger. After all, here's a guy who had compiled a great record by early-2009 (anticipating a market loss which incidentally erased every bit of return achieved by the S&P 500 in excess of Treasury bills, all the way back to June 1995), and yet, seemingly unable to invest his way out of a paper bag during the recent bull market advance. Fair enough – I don’t deny for a second that my insistence on making our discipline robust to extreme economic and financial uncertainties also shot us in the foot in the recent bull market upswing – but that unfortunately doesn't alter the objective evidence, or the severity of present conditions.

For the record, our experience since 2009 largely reflects the miss that resulted after stress-testing our approach against Depression-era data, remaining defensive until I was satisfied that we could navigate a far wider range of future market and economic outcomes than investors presently seem to contemplate (see Notes on an Extraordinary Market Cycle for details on how that challenge was addressed). But again, none of that alters the fact that the period since March 2012 has been among the most negative 1% of historical instances on our measures. Our defensiveness during this period has been every bit reflective of what we would have advised in similar conditions throughout history (and in fact advised during similar conditions in 2000 and 2007). The S&P 500, after an entirely uncorrected advance and well over a year without a 10% retreat, is presently 6.8% above its March 2012 high. It’s an open question whether that gain will prove to be durable.

It’s a good reminder that the average bear market loss represents a run-of-the-mill market retreat of about 32% and wipes out more than half of the preceding bull market advance. An average bear market within a “secular” bear market period (a period generally about 17-18 years, where valuations begin at rich levels and achieve progressively lower levels over the course of 3-4 separate bull-bear cycles) is about 39%, and wipes out about 80% of the preceding bull market advance. The following chart (from Too Little to Lock In) provides a view of the sort of valuations we typically see at the beginning of secular bull market advances, versus where we are at present.

wmc130204b.jpg

It’s interesting that even among investors who embrace the evidence regarding present overvalued, overbought, overbullish, rising-yield conditions, we see a sudden focus on short-term considerations – commercial paper yields are still a few basis points below their 10-month average, economic conditions seem to have briefly shifted from threatening to merely tepid, and so forth. Moreover, investors unanimously point to the Fed, believing that it will be safe to hold stocks until the instant some signal occurs that inflation is picking up or the Fed is stepping back, and assuming that tens of millions of investors can simultaneously exit stocks at that point, into what would surely be a vacuum of demand. This is like standing by a window at a party, seeing an oncoming wrecking ball, and reasoning that the prevailing wind will slow the ball down long enough to eat another cupcake and still beat the crowd down the stairs the moment the glass breaks. Historically, widely embraced strategies like “don’t fight the Fed” and “don’t fight the tape” have performed poorly, on average, once overvalued, overbought, overbullish, rising-yield conditions have emerged.

Read the complete commentary


Rating: 2.4/5 (14 votes)

Comments

traderatwork
Traderatwork - 1 year ago
Hussman (funds) is a very consistent person,

1. Lost money for the client

2. Keep charging fees while losing the client's money

3. Bearish to the market

4. Write long articles that have lot's of words but no content

vgm
Vgm - 1 year ago
Agree with comments above.

And in any case, how can someone actually believe there's something new or interesting to say every week?
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
First let me say; I've never owned Hussman Funds. Can't as I'm Canadian. So Traderatwork and Vgm, please name a fund that hasn't lost money over the short term. (I'm getting the impression that your view of long term investing is limited to 6 months or a year or so.)

As for those long articles, they reflect a deep inspection and likely understanding of market conditions and its commensurate ratios and other metrics. Similarly, the cornerstone of "value" investing is also the measurement and monitoring of corporate metrics, their interrelationships and relative levels. If you read Buffett you'll discover his deep understanding of the market in the aggregate as well. So to bash any fund manager that watches market trends out of a wariness of downside risk of seems unwise. If you don't believe that, read Klarman before you read Buffett.

You may note from my comments that I'm attracted to those that march to the beat of a different drummer, rather than relying on the more widely accepted conventional market 'wisdom'. I like to seek out the few rational thinkers amongst all those operating in this frequently irrational market. So we need people like Buffett, Grantham, Klarman, Hussman et. al. that can periodically identify rational entry and exit ranges in a market with a proclivity for irrational pricing.
JUDS1234567
JUDS1234567 - 1 year ago


Wow, can’t believe these critics are serious. One should not judge a investor’s performance on 3-5 year time span. For the record Hussman has outperformed the SP 500 since inception, all with less risk. He was out of the market for 2000 crash and called the 07-09 stock crash as well as avoided it. All that time outperforming as well, his only mistake was being out of the rally even missing out on these gains he has outperformed.

Even more impressive he has survived survivorship bias in that most of the funds in his category have not been around since 2000 or have not survived.

Very few investors share their knowledge so consistently and even now he remains hedged. Don’t be fooled by the small periodic losses when the market turns he will once again be outperforming. As he so eloquently puts it, his objective is to outperform the SP 500 over a complete market cycle (peak to peak-trough to trough).

It is one of the ironies of investing that just as a gurus followers begin to give up on him and leave he begins to outperform and turn the ship around

batbeer2
Batbeer2 premium member - 1 year ago
Charts and predictions.... sigh.

My prediction: The market will fluctuate.
Cornelius Chan
Cornelius Chan - 1 year ago
Hussman's Strategic Growth Fund 10-year cumulative return is 54.3%, beating the S&P by 19.5%. Nothing wrong with that.

The following are some items in Hussman's commentary that deserve sober reflection.

"Present market conditions now match 6 other instances in history... these conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history."

"...based on long-term inflation expectations (measured by the spread between nominal Treasury yields and TIPS), further quantitative easing became inappropriate on [i]precisely the day that it was announced. Further, the evidence from the most recent cycle is that the primary benefit of QE (both in the U.S. and among other central banks) is to help stocks to recover the loss that they experienced over the preceding 6-month period, and to temporarily enhance economic activity over a three-month period."[/i]

[/i][i]"As Bill Gross of PIMCO observed last week “Credit is now funneled increasingly into market speculation as opposed to productive innovation. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return.” I would suggest that this countdown is well underway."

"On the economic front, much of the enthusiasm about the economy here is actually driven by the behavior of stocks themselves."

"Our main concern about recession derives from larger concerns about the serviceability of global debt burdens, and the strain that economic weakness would have on that serviceability. So again, we’ve [i]assumed
long-term economic growth in our valuation work. It’s just that the risk of economic downside is separately worth considering, because it would complicate already negative market prospects."

"...the amount of cash on corporate balance sheets has grown by about $600 billion in recent years. The amount of debt has increased by about 5 times as much... Oddly, Wall Street seems to celebrate “cash on the balance sheets” without accounting for the corresponding debt[/i]"

LwC
LwC - 1 year ago
"I’m keenly aware that the reflexive answer to these concerns is to disregard the messenger. After all, here's a guy who had compiled a great record by early-2009 (anticipating a market loss which incidentally erased every bit of return achieved by the S&P 500 in excess of Treasury bills, all the way back to June 1995), and yet, seemingly unable to invest his way out of a paper bag during the recent bull market advance. Fair enough..."

IMO, unlike some of the commentators Hussman displays a willingness for self-reflection.

Cornelius Chan
Cornelius Chan - 1 year ago
On a practical note, taking a look at Hussman's portfolio reveals some interesting things. What immediately strikes me is that gold stocks make up almost 9% of the entire portfolio.

vgm
Vgm - 1 year ago
"Charts and predictions.... sigh."

Batbeer - my thoughts exactly. Talk about driving looking in the rearview mirror.

"As for those long articles, they reflect a deep inspection and likely understanding of market conditions and its commensurate ratios and other metrics."

Albert - please reread these words which you wrote and tell me you're still serious. It's waffle a la Hussman. Zero content. No wonder you like him. It reminds me of Buffett's warning that 'If your advisor starts talking technicals and showing charts zip up your purse and walk away.'

Excuse me while I get back to my Buffett and Klarman and Greenberg....
vgm
Vgm - 1 year ago
On frequency of communication, here's what Tweedy Browne had to say in their March 2012 AR:

"While we are aware that many in the money management business communicate with their investors more frequently than has been the case at Tweedy, Browne over the years – some on a monthly basis – we have often wondered how one would avoid the likelihood of becoming numbingly repetitive when writing with that level of frequency. For better or worse, we can’t come up with a “new new thing” to talk about each and every month, first because our investment process, which has served us well, has been “steady as she goes” for upwards of four decades, and second because spotting “turning points” that will send markets off in a new and sustained direction is full of false positives, and in our estimation is a low probability exercise. As we have said in the past, we are not oblivious to the world around us; it’s just that we believe our chances of success are higher if we focus on a business and its prospect..."
bentam64
Bentam64 premium member - 1 year ago
Hussman raises good points, and his argument seems well thought out.

Excellent article.
w1omega
W1omega - 1 year ago
I'm starting to think Hussman is a perfect case of Ray Dalio's statement that if you live by the crystal ball, you are bound to eat ground glass. The fact of the matter is that no one has a crystal ball. If he really did protect his investors in 2000 and 2008, that's commendable, but you gotta wonder if he has a negative tilt. If he does, then he's bound to be right some time, but that's not that impressive.

I saw 10 year increase in Well Fargo's book value. It even increased in 2007, 2008, and 2009. Sure, the stock price crashed along with all the other banks, but lots of quality companies retained strong earnings through the financial panic. Hussman is an academic with a Phd. He's going to write professionally sounding essays, but that d/n mean he's right. Even efficient market hypothesis, which has been proven wrong by Buffett, was written with intelligent sounding words.

I think Howard Marks and Bob Rodriguez are better investors, personally. They both know they can't time it. Not sure if Hussman knows that.
Rub
Rub - 1 year ago
Hussman is getting more agitated by the week and it's barely February. If David Tepper is correct about 2013 then Hussman will probably be out of business by December.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Is Hussman primarily timing or hedging?

Cornelius Chan
Cornelius Chan - 1 year ago
"And in any case, how can someone actually believe there's something new or interesting to say every week?"

Stock market investing, like any other worthwhile endeavour, is a passion and a life's work for those dedicated enough to take it up as a profession. This can even be true for the part time investor. If one of the gurus wants to write a running commentary on one of the highest pursuits available to man, live and let live bro! There are thousands of us small investors, part-timers, amateurs and hobbyists who have something to learn from Hussman's weekly remarks.

Hopefully you have solidified into a particular investing method by now. If so, there is no need to put down Hussman's track record or market analysis. You claim Buffett as one of your guides - what about his quote that the percentage of total market cap relative to the U.S. GNP is “probably the best single measure of where valuations stand at any given moment.”

Sounds a lot like Hussman. Ever heard of overlap? Get over it.

"I think Howard Marks and Bob Rodriguez are better investors, personally. They both know they can't time it. Not sure if Hussman knows that."

Have you checked out Hussman's recent buys and adds? What about his holds? Check it out right now and do some thinking. He is doing in his own way what all the other gurus are doing. Get over it.

The bottom line is - since most of us are small fry novice investors, we would do better to look for areas we can learn from rather than areas we can semi? competently put down.

sww
Sww - 1 year ago
@C.W.R.

Not sure where you get Hussman fund return for 54.3%

" Hussman's Strategic Growth Fund 10-year cumulative return is 54.3%, beating the S&P by 19.5%. Nothing wrong with that."

This is from their website : http://www.hussmanfunds.com/theFunds.html

Average Annual Total Returns

for periods ended 1/31/13

1 Year -12.31%

3 Year -5.78%

5 Year -4.18%

10 Year 1.52%

SinceInception(07/24/00) 4.62%

10 years compound 1.52% is Total 1.162 = 16.2% for 10 years.

10 years compound 3% T-bill 34.40% no fees no load

The $100 you invest 5 years ago with his fund left you under water at 77.28 and your last year $100 left you 77.69 today.

sww
Sww - 1 year ago
@_JUDS1234567,

It's Buffett said he will judge a investment manager on 3 years, 5 years basis. So you said you are right and Buffett wrong?

And Hussman

3 years APR -5.78%

5 years APR -4.18%

So you said it's OK?

sww
Sww - 1 year ago
@AlbertaSunwapta

Check out Morningstar for all the great funds say start with FAIRX - Fairholme by Bruce Berkowitz
Cornelius Chan
Cornelius Chan - 1 year ago
Not sure where you get Hussman fund return for 54.3%

Got it from GuruFocus' Hussman profile page. Can be found here.

You are right - Hussman's website lists different numbers from GF's Hussman profile page.

Let's let Dr. Charlie Tian wade into this to settle the numbers.

gurufocus
Gurufocus premium member - 1 year ago
The data we had was for the periods until Dec. 31, 2011. We just updated the data. For the periods ended on Dec. 31, 2012, Hussman Strategic Growth Fund performances are:



Average Annual Total Returns

for periods ended

12/31/12
1 Year-12.62%
3 Year-5.05%
5 Year-4.01%
10 Year1.69%
Since

Inception

(07/24/00)
4.84%
vgm
Vgm - 1 year ago
LOL! So, we have the real figures. Quite a comedown from CWR's figure!!
gurufocus
Gurufocus premium member - 1 year ago
Please note that the data are for "Average Annual Total Returns for periods ended 12/21/2012."
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Jeremy Grantham has an interesting letter out. It's worth noting his comments about current market valuations. As well as his discussion of market returns not correlating with GDP growth.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Maybe Gurufocus can help here.

What's the median guru 10 yr return? What was their return in 2009? (Ability to protect on the downside is important for retail investors as unlike Buffett, not everyone has the luxury of riding out economic collapses.)

I admire Hussman, and Grantham for being able to judge the macro environment quite well. And offer protection on the downside. However both were poor at predicting massive government intervention and the bailing out of everyone under the sun, raising back up all boats, even the leaky ones.

Moreover, even Buffett when he had the ability, has 'left the market' and periodically sat almost wholly in cash through a lack of ability to find bargains. Avoiding the early 1970s downside, as Buffett has said, prevented him from having mediocre returns. The difference i believe between Buffett and Hussman, has been Buffett's faith in a return to normal, whereas Hussman has been very wary of that happening today.

JUDS1234567
JUDS1234567 - 1 year ago




@Sww I believe you are taking this out of context. In Buffett’s partnership letters he said a minim of 5 years and in recent BRK letters he judges investment on a 5-10 year basis. 3 years is far too short.

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