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Results 401–450
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Warning: A New Who's Who of Awful Times to Invest
by John P. Hussman of Hussman Funds,
Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. Importantly, the market is again characterized by an extreme set of conditions that we've previously associated with a Who's Who of Awful Times to Invest.
Unusual Drawdown Risk
by John P. Hussman of Hussman Funds,
Presently, the investment opportunity set remains one of the most unfavorable in history - we estimate a 4.4% annual total return for the S&P 500 over the coming decade, corporate bond yields are now at just 3.3%, the 30-year Treasury yield is at 3.2%, the 10-year Treasury yield is at 2.0%, and Treasury bill yields are at 0.1%. We would view a significant change in the investment opportunity set as a very welcome development, but we remain unwilling to accept significant risk for insignificant or negative prospective return simply because of the temporary absence of better opportunities.
Hot Potato
by John P. Hussman of Hussman Funds,
A hot potato has been repeatedly passed from speculatively overvalued, overbought, overbullish market conditions driven by massive central bank interventions, to credit strains and emerging economic weakness nearly the instant those interventions are even temporarily suspended. The same speculators who have historically accompanied major and intermediate market peaks have emerged, followed by the emergence of credit strains, economic pressures, and a flight to safe-havens. The market is in an extended game of hot potato which will be resolved by the eventual removal of both conditions.
Notes on Risk Management - Warts and All
by John P. Hussman of Hussman Funds,
Presently, there seems to be an unusually wide gap between hindsight and foresight, both in the financial markets and in the economy. In both cases, forward-looking evidence suggests weak outcomes, but recent trends encourage optimism and risk-taking. Rather than sugar-coat these uncertainties and minimize the messy divergences in the data, I think the best approach is to review the evidence, warts and all, including economic risks, market conditions, and the strengths and limitations of our own investment approach.
Warning: Goat Rodeo
by John P. Hussman of Hussman Funds,
We're observing an "exhaustion" syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period (not a typo). Worse, this is coupled with evidence from leading economic measures that continue to be associated with a very high risk of oncoming recession in the U.S. - despite a modest firming in various lagging and coincident economic indicators, at still-tepid levels. Compound this with unresolved credit strains and an effectively insolvent banking system in Europe, and we face a likely outcome aptly described as a Goat Rodeo.
Dodging a Bullet, from a Machine Gun
by John P. Hussman of Hussman Funds,
The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal. Rather than overstating the case one way or another, we remain strongly concerned about recession risk, but recognize the recent stabilization and the potential for a low-level continuation of that.
Dwelling In Uncertainty
by John P. Hussman of Hussman Funds,
When unseen states of the world have to be inferred from imperfect and noisy observable data, there are a few choices when the evidence isn't 100%. You can either choose a side and pound the table, or you can become comfortable dwelling in uncertainty, and take a position in proportion to the evidence, and the extent to which each possible outcome would affect you.
Leading Indicators and the Risk of a Blindside Recession
by John P. Hussman of Hussman Funds,
The balance of leading evidence continues to indicate a very high likelihood of an oncoming recession. We respect the various marginal improvements in the data in recent months, which do take the probability to less than 100%, but that is a far cry from suggesting that recession risk is anywhere close to being "off the table." Recession is not a certainty, but it remains the most probable outcome at present.
The Right Kind of Hope
by John P. Hussman of Hussman Funds,
We enter the year with great hope. But our hope is not for continued speculation and the maintenance of rich valuations (that only look reasonable because long-term cyclical profit margins are at a short-term peak about 50% above their historical norms). Our hope this year is for a return to a proper investment opportunity set - where saving is encouraged and rewarded by sufficiently high prospective returns, and the cost of capital is high enough to discourage high-risk, low-return investments and unsustainable fiscal deficits.
Brief Holiday Update
by John P. Hussman of Hussman Funds,
As I noted last week, there is a typical "sentiment cycle" in economic surprises, which we would expect to roll over to an increasing number of economic disappointments in the weeks ahead, but we'll respond to the data as it emerges. Given that we're in a typically low-volume, slightly positive seasonal period, I expect that day-to-day movements over the next several sessions may be more influenced by those factors than by meaningful economic or international developments.
When "Positive Surprises" Are Surprisingly Meaningless
by John P. Hussman of Hussman Funds,
How much importance should we put on the fact that economic data has delivered positive surprises in recent weeks? Don't all these surprises significantly short-circuit the risk of probable recession? As economist John Williams observes, "starting in October, a divergence developed: Whereas year-to-year change in BLS estimated payroll earnings continued at a more-or-less constant, positive level, tax receipts fell quite markedly. Where the Treasury numbers reflect full reporting, the BLS data are sampled..modeled and..revised...the BLS has overstated average earnings..in recent months."
Hard-Negative
by John P. Hussman of Hussman Funds,
The present market environment warrants unusual concern, in my view. Based on a wide variety of evidence and its typical market implications over an ensemble of dozens of subsets of historical data, the expected return/risk profile of the stock market has shifted to hard-negative. This isn't really a forecast in the sense that shifts in the evidence even over a period of a few weeks could move us to adjust our investment stance, but here and now we observe conditions that have often produced abrupt crash-like plunges.
Have We Avoided A Recession?
by John P. Hussman of Hussman Funds,
Recent U.S. economic reports have improved modestly from the clearly negative momentum that we saw in late-summer. Unfortunately, the underlying recessionary pressures we observe are largely unchanged. When we take the present set of economic evidence in its entirety, we see very little evidence of a meaningful reduction in recession risks. Indeed, the evidence from the rest of the world, both developed and developing, reinforce the expectation that the global economy is approaching a fresh contraction.
Are Corporate Balance Sheets Really the Strongest in History?
by John P. Hussman of Hussman Funds,
At an aggregate level, corporate balance sheets look reasonable, but are certainly not "stronger than they have ever been in history." Cash levels are elevated, but this is at best a second-order factor (with excess cash representing only a few percent of total assets), while debt remains near record levels relative to total assets and net worth.
Why the ECB Does Not Bail Out Distressed Debt
by John P. Hussman of Hussman Funds,
Investors are not likely to be treated with a "surprise" announcement that the ECB is going to expand its purchases of distressed European debt. Any significant ECB intervention would likely follow a formal revision of EU treaties that trades greater ECB flexibility in return for more centralized fiscal control.
Reduce Risk
by John P. Hussman of Hussman Funds,
Nearly every traditional asset class is priced to achieve miserably low long-term returns. Meanwhile, our leading economic measures are negative, and the global economy has already begun to show overt signs of a new downturn. We can understand that investors are inclined to hold off any concerns until an economic downturn can be seen and touched in actual (not just leading) U.S. data, but that inclination comes with the prospect of trying to reduce risk when a hundred million other investors suddenly become interested in doing the same thing.
Whipsaw Traps
by John P. Hussman of Hussman Funds,
Current market conditions cluster among a set of historical observations that might best be characterized as a "whipsaw trap." Though last week's rally triggered several widely-followed trend-following signals, the broader ensemble of data suggests a high likelihood of a failed rally. In this particular bucket of historical observations, less than 30% of them enjoyed an upside follow-through over the next 6 weeks. So while the expected return/risk profile of the market remains negative here, we have to be somewhat more tentative about taking a "hard" defensive position.
Penny Wise and Euro Foolish
by John P. Hussman of Hussman Funds,
The bottom line is a) Euro leaders will likely initiate a forced bank recapitalization within days; b) Greece will default, but the new hold-over funding may give the country a few more months; c) the EFSF will not be "leveraged" by the ECB; d) banks are likely to take haircuts of not 21%, but closer to 50% or more on Greek debt; e) much of the EFSF will go toward covering post-default capital shortfalls in the European banking system following writedowns of Greek debt; f) the rest will most probably be used to provide "first loss" coverage of perhaps 10% on other European debt.
Europe: Just Getting Warmed Up
by John P. Hussman of Hussman Funds,
At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.
Talking Points for the "Occupy Wall Street" Protesters
by John P. Hussman of Hussman Funds,
The proper way to address the present economic imbalances is pursue policies that encourage the restructuring of bad debt, the allocation of public funds and private savings to productive investment and new research, the accumulation of education and labor skills ("human capital") to allow workers to capture a greater share of their own productivity, and the continuation of social safety nets to ease the economic adjustments that are necessary in a deleveraging economy. In my view this requires a number of steps which not everyone will like.
Recession, Restructuring, and the Ring Fence
by John P. Hussman of Hussman Funds,
We are headed toward a recession because our policy makers never addressed the underlying problem in the first place, which was, and remains, the need for debt restructuring. This is an issue that I suspect will re-emerge to the forefront of public debate in the next year. Hopefully, the response of our policymakers will be at different. In Europe the only real option is to allow peripheral defaults; to allow distressed and insolvent countries to exit the euro; and then for those countries to redenominate their own national currencies and peg them to the euro at a gradually depreciated level.
Not Over by a Longshot
by John P. Hussman of Hussman Funds,
Unless we observe a robust improvement in market internals from current levels, which appears doubtful given further confirmation of oncoming recession, the broad ensemble of data we observe doesn't offer much latitude to establish a constructive position based on, say, weak technical reversals or other scraps that the markets might toss out in the near term. The first 13 weeks of a recession are among the most predictably hostile periods for equities in the data. We'll take our evidence as it comes, but the primary risks - recession, default and global credit strains - continue to increase.
Preparing for a Greek Default
by John P. Hussman of Hussman Funds,
The yield on 1-year Greek government debt ended last week at 110%, down slightly from a mid-week peak of 130%. Even with the pullback, the Greek yield structure continues to imply default with certainty. All the markets are really quibbling about here is the recovery rate. That figure was still hovering near 50% as of Friday, but was a bit higher than we saw a few days earlier. A bailout today does not avert default, but at best defers it to a later date, and squanders funds that could otherwise be used to stabilize the European banking system once that inevitable default occurs.
Fed Policy: No Theory, No Evidence, No Transmission Mechanism
by John P. Hussman of Hussman Funds,
One of the main factors prompting a benign response to what is now a recession and virtually certain Greek default is the hope that the Fed will launch some new intervention. Many view the present weakness as a replay of 2010, however, the evidence tells a different story. While we have to allow for the possibility of a knee-jerk response in the event of further Fed intervention, it is also much clearer now than it was in 2010 that quantitative easing does not work. To a large extent, the only basis for further Fed action here is superstition in the absence of either fact or theory.
An Imminent Downturn: Whom Will Our Leaders Defend?
by John P. Hussman of Hussman Funds,
The global economy is at a crossroad that demands a decision-whom will our leaders defend? One choice is to defend bondholders-existing owners of mismanaged banks unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.
A Reprieve from Misguided Recklessness
by John P. Hussman of Hussman Funds,
Over the past three years, Wall Street and the banking system have enjoyed enormous fiscal and monetary concessions on the self-serving assertion that the global financial system will "implode" if anyone who made a bad loan might actually experience a loss. Because reversing this mantra is so difficult, policy makers are likely to continue fitful efforts to "rescue" this debt for the sake of bondholders. The justification for those policies will therefore have to be coupled with rhetoric that institutions holding these securities are too "systemically important" to suffer losses.
Whack-A-Mole
by John P. Hussman of Hussman Funds,
What did I think of Rick Perry's comments about Ben Bernanke? Frankly, I thought they were unfortunate. Perry suggested that monetary intervention would be "playing politics," which implies that Perry believes the Fed actually has the power to benefit the Obama Administration by improving the economy with its interventions. We certainly differ on that point. In my view, QE2 was an economically baseless attempt to distort the financial markets and force the prudent into taking risk in hopes of substituting speculation for innovation. Perry gives Bernanke far more credit than I do.
Two One-Way Lanes on the Road to Ruin
by John P. Hussman of Hussman Funds,
The reason we are facing a renewed economic downturn is that our policy makers never addressed the essential economic problem, the need for debt restructuring. There are two one-way lanes on the road to ruin, and these are unfortunately the only ones on the present policy map: 1) Policies aimed at distorting the financial markets by suffocating the yield on lower-risk investments, in an attempt to drive investors to accept risks that they would otherwise shun; 2) Policies aimed at defending bondholders and lenders who made bad loans, which they now seek to have bailed out at public expense.
Recession Warning, and the Proper Policy Response
by John P. Hussman of Hussman Funds,
As of Friday the S&P 500 was below its level of November 2010, when the Fed initiated its second round of quantitative easing. Aside from a brief bump in demand that kicked the recession can down the road a bit, the U.S. economy is not much better off. Meanwhile, countless individuals in developing countries have been injured by predictable commodity hoarding and global price instability. The Fed has leveraged its balance sheet by over 55-to-1. As policy makers look to address the abrupt deterioration in U.S. , we should ask ourselves: Do we really long for more of the Fed's recklessness?
More Than Meets the Eye
by John P. Hussman of Hussman Funds,
Our concerns remain focused on significant "core" issues facing the markets and the economy, including overvaluation, compressed risk premiums, over-reliance of investors on the maintenance of record profit margins, unresolved mortgage strains, and sovereign debt problems. Valuations remain rich on the basis of normalized earnings, market internals have deteriorated considerably, and recession risks are increasing. There are certainly various policy developments that are likely to provoke investor enthusiasm from time to time. What is important to us is the weight of the evidence.
Simple Arithmetic
by John P. Hussman of Hussman Funds,
For most countries in Europe, government revenues typically run between near 40% of GDP, while government spending presently runs several percent ahead of that. In Greece, government debt now represents about 150% of GDP at interest rates between about 10% for very short and very long-maturity debt, to about 25% annually on 2-year debt. The overall average yield on Greek debt is close to 15%. The problem is that 15% interest on 150% of GDP works out to 22.5% of GDP in interest costs if the debt actually has to be rolled-over without restructuring it.
Dabbling with Support
by John P. Hussman of Hussman Funds,
The market continues to have the look of a broad topping process, in which it's very common to see it's confined to a trading range of about 5-7% for 6-8 months. Near-term, tests of widely-recognized "support" are often met by a bout of short-covering, similar to what we observed two weeks ago. Given the moderate improvement in market internals produced by that rally, a retest of those lows that isn't overly hostile to market internals might provide some latitude for market exposure. Suffice it to say that constructive opportunities are likely to be limited, but not impossible to achieve.
A Wile E. Coyote Market
by John P. Hussman of Hussman Funds,
Fridays employment report, showing an increase of 18,000 in non-farm payrolls and a jump in the unemployment rate to 9.2% was widely viewed as a "shocker" Frankly, I dont understand the surprise. Between February and April, weekly new claims for unemployment (4 week average) dipped below 400,000, which was associated with a few months of nice growth in non-farm payroll employment. Since then, weekly unemployment claims have moved higher, and have been running at an average near 425,000 new claims weekly. Historically, thats a level that's correlated to zero growth in non-farm payrolls.
Chutes and Ladders
by John P. Hussman of Hussman Funds,
We are all playing a game of Chutes and Ladders where it is not at all clear which game-board is applicable. To believe strongly in a certain investment outcome is to imagine that there is only one correct model of the world, and that the correct model is in hand. Investors appear very eager to apply post-war norms to the economy, and to apply the elevated valuation norms of the past two decades to the stock market. I doubt that these models represent the correct view of the world, but our approach is to allow for these possibilities and dozens of alternate ones.
Brief Update
by John P. Hussman of Hussman Funds,
Despite the brief reprieve of market concerns Thursday on tentative agreement over Greek aid, we saw little change in the value of Greek debt. While there is a great deal of short-term attention on day-to-day developments on this front, credit spreads effectively indicate expectations of certain default within a roughly 2-year window, but very small risk of near-term default. Until we observe a firming in market internals and in leading economic measures, we expect that enthusiasm about Greece may provoke short-lived market spikes and short-squeezes, but little of durable effect.
Greek Yields: 'Certain Default, But Not Yet'
by John P. Hussman of Hussman Funds,
Either long- and intermediate-term Greek debt is a tremendous bargain here, or it is going to default. Unfortunately, the fiscal situation would almost inescapably require other European countries subsidize Greece for decades to come in order to avoid a debt restructuring. Taken together, the evidence surrounding Greece screams "Certain default, but not yet."
Internal Injuries
by John P. Hussman of Hussman Funds,
We're seeing a measurable and potentially dangerous breakdown of market internals in an environment where risk premiums remain very thin. Short-term conditions are fairly compressed, which invites a rebound, but the expectations for that have to be tempered by the still-complacent sentiment of investors. Indeed, about the only areas where we see real concern is in measures where such concern is actually predictive (rather than being a contrary indicator). These include widening interest-rate spreads in peripheral European debt, and surging credit-default swap spreads for major U.S. banks.
Handicapping QE3
by John P. Hussman of Hussman Funds,
As disappointing economic news mounted last week, the attention of market participants immediately turned to policy responses - will the Fed embark on QE3? In my view, there are three central questions relevant to this issue. The first is simply this: Has QE2 been successful in a way that the economy should desire more of it? The second: How much scope for intervention does the Fed have left? The third: Is Bernanke so invested in this attempt at balance-sheet expansion that he will push forward an extension of the policy despite its economic ineffectiveness and speculative distortions?
Small Windows in an Unfavorable Long-Term Picture
by John P. Hussman of Hussman Funds,
Last week, bullishness pulled back to 43% according to Investors Intelligence, but advisory bearishness also fell to 19.4%, with the remainder boosting the "correction" camp to 37.6%. That's not much of an easing in overall sentiment, but it was enough to give us a bit of latitude to allow us to vary our exposure between a tight hedge and a 10-15% exposure to market fluctuations. That's been of help, but mainly to offset a shallow correction in a few defensive sectors like health care. Our latitude to accept risk will vary in proportion to the average market return/risk profile.
Scarcity, Usefulness, and Getting an Edge
by John P. Hussman of Hussman Funds,
While my sense is that many investors and institutions are holding a greater market exposure than is appropriate given present return/risk prospects, I should mention that there isn't a great deal of evidence that bears and short-sellers have a particular "edge" here either. Our own investment stance is defensive but also fairly neutral, and with a preference toward moderate, if transitory, positive exposure. At the point we see a greater deterioration of market internals the market environment will probably turn hostile in a more sustained way.
Hanging Around, Hoping to Get Lucky
by John P. Hussman of Hussman Funds,
Despite the unique challenges of the most recent market cycle, I do expect that we will observe frequent opportunities to accept market risk in the coming years, even in an environment where valuations gradually work lower from a secular perspective. Even here, if we can clear some element of the hostile overvalued, overbought, overbullish, rising-yields syndrome that has characterized the market, we will be open to moderate, if transitory exposure to market fluctuations, provided that we maintain a line of index put option protection against any abrupt deterioration.
The Menu
by John P. Hussman of Hussman Funds,
One of the ways investors can think about prospective return and risk is from the standpoint of the Capital Market Line, which lays out a menu of investment possibilities at various levels of return and risk. In theory, investors like to believe that this menu is always a nice, positively sloped line, where greater risk is associated with greater prospective return. And somehow, regardless of where market valuations are, investors often seem to believe that 10% is 'about right' for the prospective return on stocks. As it happens, valuations exert an enormous effect on the prospective returns
Extreme Conditions and Typical Outcomes
by John P. Hussman of Hussman Funds,
As of Friday, the S&P 500 has advanced to a point where it is either within 0.1% or fully through its top Bollinger band on virtually every horizon. We can define an "overvalued, overbought, overbullish, rising-yields syndrome" a number of ways. The more general the criteria, the better you capture historical instances that preceded abrupt market weakness, but the more you also encounter "false positives." Still, as long as the criteria capture the syndrome, we find that the average risk profile for subsequent market performance is negative, regardless of the subset of history you inspect.
Monetary Policy in 3-D
by John P. Hussman of Hussman Funds,
One of the most important factors likely to influence the financial markets over the coming year is the extreme stance of U.S. monetary policy and the instability that could result from either normalizing that stance, or failing to normalize it. It is not evident that quantitative easing, even at its present extremes, has altered real GDP by more than a fraction of 1%. Moreover, it's well established that the "wealth effect" from stock market changes is on the order of 0.03-0.05% in GDP for every 1% change in stock market value, and the impact tends to be transitory at that.
Approaching the Eraser
by John P. Hussman of Hussman Funds,
Market conditions in stocks continue to be characterized by a hostile syndrome of overvaluation, overbought conditions, overbullish sentiment, and rising interest rates, which has historically been associated with a poor return/risk profile, on average, across a wide variety of subsets of historical data. Though I question the ability of the economy to "pass the baton" to the private sector as government stimulus effects run off in the coming 8-10 weeks, I should emphasize up front that our present defensive position is not driven by those economic concerns.
Charles Plosser and the 50% Contraction in the Fed's Balance Sheet
by John P. Hussman of Hussman Funds,
Last week, an unusual event happened in the money markets that should not escape the attention of investors. The yield on 3-month Treasury bills plunged to less than 5 basis points. As I noted this past January in Sixteen Cents: Pushing the Unstable Limits of Monetary Policy, a collapse in short-term yields to nearly zero is a predictable outcome of QE2, based on the very robust historical relationship between short-term interest rates and the amount of cash and bank reserves (monetary base) that people are willing to hold per dollar of nominal GDP.
Three Profit Metrics to Avoid Earnings Season Myopia
by Bill Hester of Hussman Funds,
Alcoa, the aluminum producer, announces its earnings on Monday. So begins the reporting season of first-quarter company results. During this period in particular, it may be easy to become enamored with past corporate performance and miss potential forward-looking risks. To counterbalance the deluge of earnings reports to be delivered over the next few weeks, here are a few intermediate-term indicators and trends that investors may want to watch to gauge earnings conditions.
Will the Real Phillips Curve Please Stand Up?
by John P. Hussman of Hussman Funds,
Much of the intellectual basis for the Federal Reserve's dual mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" is based on the Phillips Curve. The curve, named after economist A.W. Phillips, is understood as a "tradeoff" between inflation and unemployment. The idea is so engrained in the minds of economists that it is taken as fact. High unemployment, is associated with low inflation risk, and in that environment, policy makers can pursue measures targeted at increasing employment, without consequences for inflation.
Results 401–450
of 519 found.
