John Hussman: Defensive, With a Measure of Equanimity

Excerpt from the Hussman Funds' Weekly Market Comment (10/05/09):

Four weeks ago, I noted that if indeed the economy is in recovery, we have already entered the “show me” phase. The jobs report was dismal on that front, with even overtime hours and temporary workers declining. Those are the first measures that should advance, well before we can expect any turn in headline employment. The unemployment rate met expectations at 9.8%, but only because 571,000 workers left the labor force, dropping out of the calculation entirely.

My view continues to be that the intrinsic condition of the U.S. economy has not improved, and that the green shoots we've observed are a transient artifact of green dollars poured out by the government. There is little reason to expect this spending to propagate into “organic” growth. Of the range of possible catalysts for fresh risk aversion, my guess is that all hell is likely to break loose at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further. That, however, could be months from now. Think about it – we've got continued employment weakness, coupled with continued record delinquencies and foreclosures, compounded by a mountain of Alt-A and Option-ARM resets that only started a few weeks ago and will continue heavily into 2010 and even 2011. By what magic has a replay of the recent credit crisis been averted?

Still, we consider all the risk factors, but in the end, base our investment positions on the prevailing weight of the evidence as it stands at present – not on any specific scenario about the future. Valuations are not attractive here, price-volume behavior is notably tepid, advisory bullishness is nearly as high as it was at the 2007 peak, and earnings estimates for coming quarters already require a return to record high profit margins (see Bill Hester's research piece this week – additional link below). Still, market internals have not broken down notably, and a reasonable portion of the overbought condition of recent weeks has been cleared. Our assessment of current conditions is defensive, but we also have to have some equanimity about possible market direction until we observe further deterioration in market internals.

Comments

[Larry House:]

Reasonable assessment as always, John. One can't deny the tape, but it is hard to see substance upon which to base it. Interesting times.

Oct 05 11:50 AM

[Steve in TN:]

I always enjoy John Hussman's articles but it is tempered by his overall total return results which are not good.

Oct 05 01:39 PM

[DormRoom:]

I'm confused by all the bearishness. Doesn't classical Keynesian theory state that government intervention to prop up Aggregate demand will help stop deflation, as it stabilizes wages, and prices. And hasn't the current macro indicators (except the employment rate, which has always been considered a lagging indicator) demonstrated that Benanke has done so? And is willing to do more, if the need arises?

If you look at the macro indicators for the emerging markets, they are more robust than the U.S. And in a globalized economy shouldn't this lead to more optimism for a V shaped recovery, since most multi-national corporation, by definitions have distributed risks across geo-markets?

Oct 05 04:51 PM

[untrusting ...:]

Larry,
Exactly correct. The stock market is in a delusional liquidity driven phase, probably largely stage managed by a handful of large prop. desks with Fed/Treasury approval. See the below for an example of headline info just reported on CNBC

Mosiac Potash (MOS) just reported and the summary was: expected EPS:$0.35/share, actual EPS:$0.23, year-ago EPS:$2.65 and Revenue down 66%.

It would be pretty hard to have any Q3 results much worse than that. When you can't even beat an almost 900% expected decline in EPS and come in even worse than that ... the only thing that could be much worse is filing for bankruptcy. MOS closed at $46.09/share and is trading up in afterhours. If that is not TOTAL DELUSION then one would be hard pressed to say what would be.


On Oct 05 11:50 AM Larry House wrote:

> Reasonable assessment as always, John. One can't deny the tape, but
> it is hard to see substance upon which to base it. Interesting times.

Oct 05 08:21 PM

[untrusting ...:]

If one reads Bill Hester's link in Hussman's article, it quantifies why so many of us believe this current market is absurdly overvalued at this point.

Oct 05 08:34 PM

[frank90291:]

I read Dr.Hussman every month..... a really smart guy!!
Government stats are interesting but what evidence is there that this dept is any better run than the post office or any other brain-dead gov agency...
My favorite economic indicators, which change hourly, are the number of homeless sleeping on the streets and the boardwalk in Venice Beach and the increase in the number white people working at McDonalds in black and Hispanic ghettos of Los Angeles....
We should all be able to explain why we own a particular stock or fund, otherwise we have no business buying the damned thing...
Why do I own GS? GS is the 9,000 lb gorilla, the great corruptor, the evil empire, the great Wall St shark... you name it... If the conspiracy guys out there want to know who will run the World, give GS a look.
Why do I own GLD? If anyone has a better, less volatile, more successful stock, ETF or fund for the last 4 years, please let me know...
Be sure to set your stops and get ready to pounce on TLT when it drops 20% or more...
Look out below!!!

Oct 06 09:37 AM