Instead of the weekly market commentary, John Hussman published the 2010 semi-annual report for the two funds the he manages (Hussman Strategic Growth Fund and Strategic Total Return Fund).
Hussman runs on a long/short strategy for the stock fund (Strategic Growth). When all things (low market valuation level and bullish market action) are aligned, he will be constructive with his exposure to the market. When thing are not so certain (high valuation or bearish market action, or both), he will hedge his stock portfolio with puts of stock indices. For the past decade, he has lifted his hedge only during a few brief periods of time. When all said and done, the fund outperformed the S&P 500 during the past 10 years and incurred far less volatility, but it lagged behind the benchmark during the past 1, 3, and 5 years. To make the matters worse, the fund had negative returned during these periods.
The negative return made Hussman rather uneasy, and for the past couple of months, he had adjusted his model to allow more exposure to the market as he stated in the semi-annual report:
That said, Hussman continues to be cautious going into 2011. He took issues with the Fed policies, FASB, and analysts who call the market cheap based on “forward operating income”. Again, he has this warning for the market participants:
Read the full semi-annual report here.
Also check out:
Hussman runs on a long/short strategy for the stock fund (Strategic Growth). When all things (low market valuation level and bullish market action) are aligned, he will be constructive with his exposure to the market. When thing are not so certain (high valuation or bearish market action, or both), he will hedge his stock portfolio with puts of stock indices. For the past decade, he has lifted his hedge only during a few brief periods of time. When all said and done, the fund outperformed the S&P 500 during the past 10 years and incurred far less volatility, but it lagged behind the benchmark during the past 1, 3, and 5 years. To make the matters worse, the fund had negative returned during these periods.
The negative return made Hussman rather uneasy, and for the past couple of months, he had adjusted his model to allow more exposure to the market as he stated in the semi-annual report:
It was not until 2010 that we finally established an adequate and robust solution to these challenges, which we recently put into practice after extensive validation testing. I’ve described these methods at more length in my Weekly Market Comment on the Hussman Funds website. Briefly, rather than assuming that any single set of investment criteria is “best,” we evaluate scores of criteria over numerous historical data samples. If an observed set of market conditions would have resulted in strong average market returns regardless of which model or subset of data we examine, we conclude that significant exposure to market risk is warranted. In contrast, if a given set of conditions is associated with a wide range of possible outcomes depending on the subset of data we examine, we take a more cautious approach, even if the outcomes are positive on average. In this way, our exposure to market fluctuations can reflect the expected return, risk and uncertainty that has historically been associated with the investment conditions we observe at each point in time, without relying on any one particular view of the world. The implication for Strategic Growth Fund is that shareholders can expect a greater range of positive market exposures than we have accepted in past years, but also a tightly defensive stance in response to historically hostile market conditions.
That said, Hussman continues to be cautious going into 2011. He took issues with the Fed policies, FASB, and analysts who call the market cheap based on “forward operating income”. Again, he has this warning for the market participants:
None of this, however, implies that a severe market downturn should be expected over the near term. Though it is not possible to rule out a substantial decline in market valuations, our main reason for defensiveness as we enter 2011 is that the market environment is characterized by a syndrome of elevated valuations, overextended price trends,overbullish investor sentiment, and rising interest rates. This combination of conditions typically does not persist for more than a few months, but when the complete set has been observed, the stock market has often been vulnerable to abrupt losses that can erase weeks or months of gains in a few trading sessions.
Read the full semi-annual report here.
Also check out:
