John Hussman: It's Not Over Yet

Excerpt from the Hussman Funds' Weekly Market Comment (4/27/09):

After a sharp decline on Monday of last week, the market spent the remainder of the week recovering much of the loss. Overall, price/volume behavior continues to be uninspiring, leaving it still difficult to infer that investors have adopted a robust preference toward risk taking. The strongest characteristic of market action here is breadth (advances versus declines), but that also contributes to a variety of popular overbought indications, such as the number of stocks over their 50-day averages (which recently peaked above 80%, about where prior bull market rallies have tended to fail), and the McClellan oscillator and summation index, which are also fairly extended.

That's not to say that stocks have to decline here, but having failed so far to recruit much in the way of strong volume sponsorship, there is not much speculative merit to market risk, and only a modest amount of investment merit on the basis of valuations. Even if profit margins sustainably recover to above-average levels in the years ahead, stocks are priced to deliver probable total returns of about 10% annually over the coming decade. The idea that stocks are “once in a lifetime bargains” ignores the fact that this bear market began at strenuously overvalued levels on record profit margins – conditions that are not likely to return naturally in a deleveraging economy. Investors are taking the depth of the decline as a measure of the probable subsequent gain, but historically, the market doesn't work that way. There is little relation between the depth of a bear market and the strength of the subsequent bull.

...

For my part, I remain convinced that without serious efforts at foreclosure abatement (ideally via property appreciation rights), mortgage losses will begin to creep higher later this year, surging in mid-2010, remaining high through 2011, and peaking in early 2012. To believe that we are through with this crisis or the associated losses is to completely ignore the overhang of mortgage resets that still remain from the final years of the housing bubble.

Comments

[chrismatthe...:]

Cetin,

It's great seeing your post at the top of the list every time there is an article questioning the authenticity of this "new bull market". LOL. Do you have enough time to pay attention to your porfolio given your responsibilities on SA??

Apr 27 12:08 PM

[Larry House:]

You are right, John. Bold optimism here is blind and can be very costly.

Apr 27 02:03 PM

[chrismatthe...:]

Cetin,

MA seems to be failing at its 200 DMA- I am neither long nor short MA now. Where do you see MA 6 and 12 months from now?

Apr 27 02:21 PM

[chrismatthe...:]

Considering estimates are for $12.00 for 2010 do you think MA warrants a PE over 20 or do you think earnings estimates are too low? Personally I see some bearish technicals so am debating putting on a short position.


On Apr 27 03:29 PM Cetin Hakimoglu wrote:

> Much higher. 250 possibly

Apr 27 03:57 PM

[mrmillergd:]

SA really needs an "Ignore Poster" function.

Apr 27 04:34 PM

[fnu149:]

Seems like Cetin is very optimistic. I agree that in the Long run, when you are talking about 5+ years, it is no doubt that stocks are your best choice. It's because stocks mimics the overall improvement in the world economy. Unless you think the world is not going to resolve & improve, then you can be as bearish as you want.

As an investor, trader, or whatever you call it, I believe you just have to choose a strategy that fits you. You can pick your investing/trading strategy long term, short term, or medium term. It doesn't matter. You just have to have a strategy that you believe it will work.

Personally, I think the real economy won't recover this year, but the stock market may bottom out end of this year or beginning of next year. Again, this is my pick.

There are many surprising element that can kill the market in a matter of months. The two key points are:

1. The market finally got disappointed. What gov't done is not yielding the result that the market wants. In a way, market expect continuance of improvement statistic. But reality is that we will probably see more negative statistics once again.

2. This is a question you will need to ask yourself. Why does a slow down pace in decline means the next movement is automatically UP? What if the pace of decline is just temporarily slowing down and then falls again to another level? My theory is that declination doesn't have to be a straight line. We will probably see another wave of consumer spending pulling back starting very soon especially due to the continuous unemployment, over-leverage, + credit line cuts. This will affect the stock market tremendously.

Overall, I am expecting a major pull back in the stock market. Perhaps dow below 6000 by September.

Apr 27 07:00 PM

[buff butler:]

Just for fun where did you get $250 sp projection (~+50%) from?

Personally i think MA will be in the penalty box for a while as the full bredth of consumer pain continues including cleaning up housing balance sheets. As well, given the nature of this downturn I would see credit card companies as having large political risk right now. Personally I think it would be locked in a range for a while until savings rates decrease. I'd be interested to hear other ideas on this though.

On Apr 27 03:57 PM chrismatthewsisashill wrote:

> Considering estimates are for $12.00 for 2010 do you think MA warrants
> a PE over 20 or do you think earnings estimates are too low? Personally
> I see some bearish technicals so am debating putting on a short position.
>

Apr 27 08:34 PM

[logicalman:]

at this point i don't think anybody knows what the hell is going to happen in the near term or in the long term...everybody has an opinion ...the mkts don't give a hoot about our opinions..it will do what it has to do...if you are "invested" in the best stocks that you can find at the moment, and are ready to change your mind when you find something better to replace these, you will do very well....is this easy? it's a lot easier than trying to find the stock of the day...or the stock of the week....patience + an average intelligence will serve you well over the long term!!!

Apr 27 09:30 PM

[Gyoza Mimi:]

Cetin,

It appears that you are in the business of "being right". The sole goal of your messages is to say "I was right, I am such a shrewd fellow, I am The New Oracle of Omaha". That is very very dangerous. Those who pursue that "I was right" factor focus on the wrong things, and eventually get overconfident and badly burned. Be humble and listen instead of pushing these "I am so controversial, and so right" monologues.

Apr 27 09:42 PM

[fleeing omega:]

but we know (from experience) that there is only one way to learn, and that is by experience.
...and experience will be provided to all, in the fullness of time

Apr 28 01:30 AM

[Roger Knights:]

There's a great book by Edward de Bono titled, "I m Right, You Are Wrong." Ceheap on Amazon.

Apr 28 06:26 AM

[Ronald Pires:]

I much prefer the term "equity kicker" to "property appreciation rights". It so better captures how the homeowner is going to feel if he subsequently finds himself forced to sell his property for any reason.

Apr 29 09:29 PM