John Hussman: A Sack O' Potatoes Market

Excerpt from fund manager John Hussman's weekly essay on the U.S. market:

To offer an idea of how much the recent advance has represented a speculative run on "low quality," Bill Hester put together the following chart. It presents the performance of stocks rated "high quality" by Standard & Poor's, compared with the performance of all stocks with an S&P quality rating. Presently, the capitalizations being awarded to "garbage stocks" are very rich. Historically, these extremes haven't persisted.

The chart above is through the end of 2006. The same relative performance can be observed in the debt markets, where junk has clearly outperformed higher rated debt in recent years. It's notable that the "quality spread" in stocks has begun to reverse in recent weeks, along with risk spreads in the corporate bond market. Note that the yield spread on the CBOT's new credit default swap [CDS] index has just moved to a fresh high. A credit default swap is a way of transferring credit risk from one holder to another -- a rising spread indicates increased concern about default risk. This will be important to monitor in the weeks ahead.

As I've often noted, the worst situation for an investor is when risk premiums are low and are being pressed higher. When that happens, stock and corporate bond prices can weaken significantly because the only way to get the yield (and risk premium) up is to drive down the price, and it takes a substantial amount of price decline to bring a low yield to higher levels.

A seasoned investment analyst once put it to me this way in an easy southern drawl. Suppose you've got a 100 pound sack of potatoes. Now, since there's a lot of water in a potato, suppose what you've really got is 1% pure potato, and 99% water. Now suppose you let that bag sit out in the hot sun, and finally you go get it, and now it's 2% pure potato, and 98% water. What do you guess that sack weighs?

50 pounds.

That general principle is why speculating in a richly valued, overbought market with rising interest rates is typically a bad idea. This instance may turn out to be different, but the average outcomes are sufficiently poor to keep us fully hedged.

Comments

[JohnnyBitchdog]

Well, I don't have a southern drawl or folksy stories about agriculture to imply salt-of-the-earth wisdom.......

However, I will say that your conclusionary commentary seems to be self-evident in that you are basically saying that it is dangerous to buy overvalued stocks in a rising interest rate environment. Well, this is always true, but of course the real problem with your so-called analysis is this:

1. Nobody knows the future, yet you seem to be assuming further rises in interest rates.

2. Speculative stocks is a rather broad idea, and I am not sure that S&P's criteria for quality has been stable enough over time to be useful in a time series. I am not saying it is not, just that I would doubt it.

It's pretty boring but it does simply come down to interest rates and cash flows.

If I were in the warning business, I would suggest that investors avoid companies where the cash flows have a negative correlation with interest rates, because they get hit with a double whammy in a valuation model (lower cash flows valued at higher interest rates).

However, I do not necessarily agree that it is a foregone conclusion that rates will continue to rise and, of course, the important thing is real rates.

I would also add that companies that have low ability to pass through inflation should be avoided.

And your folksy man should just dehydrate the potatoes to make his life simpler.

john.

[Augustus]

That "sack of potatoes" is about what the return on investment has been for those placing their money with Hussman and HSGFX. Not really much different from having the money in the mattress. Clever writer but unable to profit from the market moves. I expect that he is hedged so many ways that it is about impossible to make a gain. Will he ever be correct - Sure, some day he will get lucky again.

[JohnnyBitchdog]

Just another case of a guy peddling chatter, while his money management skills could easily be exposed as questionable, if not downright awful.

Hussman Strategic Growth - up 20 % in 5 years while the Nasdaq is up 120% !

Gee, Mr. Hussman........can you please explain your strategery ?

Maybe the marketing could be something along these lines:

zero returns but I am friendly and always willing to chat about the market

I don't suppose it's fair to judge a guy based on this single indicator, but I am not sure you could manufacture flat returns for the last 4 years unless you were simply very very wrong about the very things you claim to understand.

Oh well.......Hussman's just another guy chatting about the market while simultaneously underperforming.

John

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[gembree]

He's beat the S&amp;P 500 by nine points annually, inception to date. Like a lot of great value-oriented managers, he looks stupid in bullish periods and brilliant in bearish periods (like yesterday, when he beat the S&amp;P by three points and made a gain).

[JohnnyBitchdog]

Listen, I am guessing you have some affiliation with this guy, but if you want to be serious, give it a go:

If he is a value manager, show me a value index he has outperformed for a serious period of time

Explain the awful 4 year performance of his "strategic" growth fund

I will admit I have not done a thorough analysis of his so-called strategy, but it doesn't take much to conclude that 4 years of flat performance is indicative of very, very poor relative performance against any reasonable index, whether value, growth, or blend.

citing one day performance is simply stupid in light of the long term performance.

john

[gembree]

He's beat the S&amp;P 500 by nine points annually, inception (2000) to date, despite lagging the last four. His stock selections have actually outperformed the index six of seven years, but he sometimes hedges his returns, so they tend to be weaker in bull markets and stronger in bear markets.

It's been a really horrible time to be hedging over the last four years, and he was early to the correction, but he's still up nine points a year on the S&amp;P 500 over seven years despite that, which is terrific. I'm not affiliated, it just makes me sad when people misinterpret a really great record, and given that he convinced me to join the bears, I owe him one this week.

[JohnnyBitchdog]

First of all, I highly doubt you have performed a professional analysis comparing his returns to the S&amp;P 500 over your pre-selected time period. For example, did you include the dividend yield of the S&amp;P ?

Secondly your time period chosen is random.

While the last 4 years is also a randomly chosen time period, it is highly unlikely that his underperformance could be anything other than lack of skill.

Thirdly, I don't even know if the S&amp;P 500 is an appropriate benchmark.

But even if you ignore all of those things, it is not a misinterpretation of performance to state this very simply:

In the last 4 years, there is not a reasonable value, growth, or blend benchmark that Hussman has not underperformed and underperformed significantly.

Now you can go ahead an convince yourself that the guy added value over the last 4 years, but that is simply delusional......a year or two can be overlooked in the context of cycles but 4 years of flat returns is simply unacceptable performance given the performance of value or growth equities over the time period.

If you really want to stick with your delusional interpretation, why don't you simply state what benchmark he should be compared against the past 4 years ?

Why ? Because doing so would expose your arguments as nothing but thin air.

john

[Paul S C]

Dear John (Lewing),

I only ask one favor of you: please remember what Hussman is selling with the Strategic Growth fund. He’s not selling the S&amp;P500, or any other long equity exposure for that matter. He is, instead, selling (what is often) a partially hedged exposure to those underlying equities. I don’t think it should come as a surprise to anyone that Hussman has not kept pace with the bull market of the last few years; frankly, to expect this is a little obtuse.

We could all learn a lot by looking back at the events of the last week, where Mr. Hussman’s meager 1.53% YTD (as of last Fri) became a modest 3.02% (as of today). Again, looking YTD, a rough calculation comparing Hussman's net performance YTD with a few investable proxies (iShares ETFs/Vanguard Index funds) for the Russell 1000, 2000, 3000, and S&amp;P500, puts Hussman ahead of all of them! In addition, to say that the returns of a single day are not material is not fair. Strategic Growth’s performance over the last few days is a function of its structure. And, it is structured to protect during days such as these - with an (fully transparent) insurance premium (which naturally costs on the upside.)

To be fair, let us ignore what has happened this July and look at the longest period we can (since inception in late July ’00). I get Strategic Growth up 11.7%, vs. 2.3% for the S&amp;P500. Is that not material? Even if we move the end-point sensitivity completely in favor of your argument and look at the full bull market from October ‘02 until June ’06 (again, ignoring this last month), we get Hussman up 7.6% vs. 15.7% for the S&amp;P. During this exceptional bull market, the latter portion of which was a ‘perfect storm’ for the fund, it was able to capture little more than 8% of down months, had a max drawdown of about half the S&amp;P, and still returned 7.6%. Is there no merit in this achievement? Judging a strategy like this over such an extended bull cycle on return alone is nothing short of irresponsible. I might add that Hussman’s down-capture since inception is -20%. So he’s up, on average, 20% of what the market loses. I won’t even mention historical standard deviation and Sharpe.

Hussman has been "fully hedged" for a perfectly good reason. His argument is sound and he doesn’t make any rash predictions. I think the least we can do is respect that and get on with our own investing.

Paul Courtney

[Augustus]

Mr. Courtney,

The time period you chose for comparison (July '00 to present) is one that would be most favorable to Hussman. The US market had just finished a long period of positive gains that were announced by even the Chairman of the Fed as "irrational exhuberance." So Hussman starts a contrary fund and gets lucky when there is immediately a strong correction of the irrational exhuberance. Take out the two years of correction and then compare the Hussman returns for the last five years with about anything you want to use.

I had some money with Hussman for a while. I did not expect him to equal the performance of the stock market in periods of good UP moves. I did expect to do as well as the Treasury 5 yr. He did not do that. That is my real complaint. I wanted bond returns during periods of strong stock markets and then real gains when there was a stock market fall.

I will try to pass on one bit of advice. Do not let the gloom and doom apocolyptics get you into a bad frame of mind. I got caught up in it 2001. I cost me a lot of money to sit it out until I finally wised up a bit by late 2004 and restarted my investment program in Jan 2005. The world is not comming to an end any time soon, and even if it was, how would you invest for that? Since Jan 2005 the compound annual gain (not counting the dead money with Hussman for 18 mos.) has been about 25% and is 13% YTD even after getting whacked in the last week. It was vexing, to say the least, to have missed out on the good runups of 2003 and 2004 because I was caught up in assessment that the markets had to correct some more with the Dow going to 1000 again. What has Hussman done over the last 30 months? Sure, he made some money this one week. He just does not do it often enough.

He continually points out that returns can be expect to be mediocre following periods of high earnings combined with high PE multiples. I can't argue with that. However, if you buy the 5 yr bond your returns will also be mediocre since rates are now still near historical lows and you will be buying those rates for your future returns when you buy that bond. There is NO NEWS in reporting that buying high earnings valued with low interest rates will not give strong returns. But, if you have money to put to work, the alternative is to buy CDs. Or buy HSGFX, expecting that the Great Crash is on the way. I don't believe that Hussman is particularly predicting the Great Crash, BTW. Just warning that stock markets will likely be pretty flat for the next XX years.

Good fortune with your investing.

[Paul S C]

Mr. Meng
I agree with much of what you say. Worth mentioning is that I am certainly not bummed about what’s happened over the last few days. Nonetheless, thanks for the advice – I’ll take all I can get.

My point with Hussman is that I don’t believe we have enough history to throw the bathwater out without the baby going with it. Granted, four years of poor absolute performance is a lot of (dirty) bathwater.

Only time will tell if a passive investor, all considered, would have been better served (over a significantly long period of time) exercising patience and hanging on to this fund. This, assuming they caught the full brunt of the last four years. I think it likely there will be many of these people looking back many years from now (or maybe sooner if this pullback continues) with a healthy dose of regret; realizing that the fund was a good, if not a great, long-term investment.

My two bits are: those who have the time, the will, and the ability to generate alpha consistently shouldn’t be invested in a mutual fund in the first place, let alone a defensive one. I, for one, am not there yet.

[JohnnyBitchdog]

Listen, I don't have the time to do a professional evaluation of Hussman against a reasonable benchmark.

However, I presume from the terminology "strategic growth" that it is an equity fund which seeks growth. Your description of it being "partially hedged" does not explain the vast underperformance.

Unless he's running a short fund or a bear fund, the returns are simply awful the past 4 years.

I would welcome a serious analysis which includes a reasonable pre-specified benchmark, but basically what I am reading sounds more like Hussman's buddies out in the cubicles trying to paint a rosy picture of his dreadful performance.

Now, I will back down if Hussman's "strategic growth" fund was simply deceptively named - if, in fact he was running a short fund that might explain his awful performance.

So, which was it......

Hussman's fund is deceptively named as part of a marketing scheme

or

Hussman was running some kind of long equity growth fund and his performance has been awful ?

john

[JohnnyBitchdog]

My final thoughts to put to rest the phony idea that Hussman's fund was performing as expected for investors. This is verbatim from the prospectus:

The Fund seeks to achieve long-term capital appreciation, with added
emphasis on the protection of capital during unfavorable market conditions.
It has the ability to vary its exposure to market fluctuations based on
factors the investment manager believes are indicative of prevailing
market return and risk characteristics.

My evaluation of this portfolio managers performance over the past 4 years is very simple:

1. awful performance for a fund with a capital appreciation focus

2. Mr. Hussman made major miscalculations about whether conditions in the capital markets were favorable

3. Even a conservative capital protection bias cannot explain the underperformance

4. The underperformance is more likely caused by failed short bets

I think it's a safe bet that Hussman's excuse makers are not an unbiased source of information.

It's really quite simple if you read the prospectus that Hussman failed in his mission to run a capital appreciation fund with added protection during unfavorable market conditions.

John.

The alternative suggestion might be that the last 4 years in the markets have been so wildly unpredictible and strange that Hussman should be forgiven for his failure. I don't buy that one, but there is a .000000000000000000000... chance that it has merit.

[JohnnyBitchdog]

Just read his prospectus and you will see a matrix describing his funds posture under 4 scenarios (www.hussman.net/pdf/hs...). The 4 postures are:

1. Aggressive
2. Moderate
3. Positive
4. Hedged

To me it is clear that his recent 4 year performance is so awful that it can't even be explained if his entire 4 year posture was "hedged".

Unless you interpret "hedged" as "short" it is a clear failure in his mandate. And even then you have to hold him responsible for being wrong for 4 years.

john

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[MDCigan]

Gembree, Paul, I think you guys pretty much have it right here. Paul, I suspect you are wasting your breath on Mr. Lewing. He seems like a troll who tries to be provocative rather then insightful or rational. I always see his negative attacks on posts by Hussman and Ritholtz and some others.

C meng, you say "Mr. Courtney,

The time period you chose for comparison (July '00 to present) is one that would be most favorable to Hussman. "

I think this is the most logical time frame has cumulatively it encompasses BOTH A BEAR MARKET AND A BULL MARKET. Over the total market history there have been several bull and bear markets. It seems rational to me to assume that at some point the bull market that began in late 2002/early 2003 will end and we will have a bear market. Hussman clearly points out his objective is to outperform the market over a FULL MARKET CYCLE which includes both a bear market and a bull market. The last 4-5 year represents only a bull market. Time will tell, but I suspect that when we get to the trough of the next bear market Hussman will have outperformed starting from the 2003 bull. Now of course, if it's different this time, and bear markets will no longer occur then Hussman will persistently underperform. Is that likely?

Not sure, but your ID looks familiar from the TMF MI board. This should be deja vu for you. Back in 98-00 there were alot of MI momentum guys who were making money hand over fist and thought they were geniuses while the value investors were doing poorly. Of course in the 2000-2002 bear, those MI guys got slaughtered while the value guys did very well.

Look, I am a HSGFX shareholder. I haven't been happy with recent returns, especially 2006, but you have to know why you own what you own. Time will tell whether current stock valuations are "reasonable" or overvalued, but I'd rather err on the side of caution.

[MDCigan]

"4. The underperformance is more likely caused by failed short bets"

I'm probably wasting my time even responding to you, but you reveal your ignorance with this statement. It might be a good idea to conduct actual research instead of just random hypothesizing.

The fund does NOT short individual stocks, and is NEVER net short the market. At most, the fund can be market neutral in that it holds a long portfolio of individual stocks that are fully hedged by index options (long puts and short calls).

[JohnnyBitchdog]

Dear Sir:

I did not say a short bet was short an individual stock.

It is simply my conclusion that the vast underperformance that Hussman has suffered and placed upon his investors is probably explained by short bets. Whether this is short futures, short baskets, or short individual stocks is really not important to me or the statement I was making.

There is no way you can suffer such underperformance unless you had failed short bets (call them hedges if you feel better about it)...........of the other possibility (less likely) is that you had very concentrated long bets that went wrong.

As far as never being net short the market - whatever.....if this guy failed by being market neutral, it's still a failure. I never said he was net short.

There are really only a handful of conclusions about Hussman's failure over the last 4 years:

1. He failed to manage to his mandate, or

2. He failed to be even remotely correct on whether market conditions were favorable or not. Take a look at the matrix in the prospectus - there are 4 options for his market posture: 1 hedged, the other 3 postures would have met or exceeded the market the last 4 years. So, we must conclude that he was sitting in the "hedged" posture for the entire period, or

3. The market the past 4 years was simply bizarre and this is why Hussman's eminent genius was not able to overcome it.

In the end, I must say Hussman has performed as an ordinary joe-sixpack joker trying to time the market but having zero ability to do so.

And I am perfectly happy to make this conclusion based on reading his prospectus and looking at the recent performance.

Is "a full cycle" going to make Hussman look better ? I doubt it, and in the end there is no such thing anyway.......there are always many cycles going on simultaneously in this global world, and this "Hussman needs a full cycle for his genius to emerge" crapola is probably just obfuscation by someone with an interest in propping up his failed performance.

John..

[JohnnyBitchdog]

MDC -

I would also point out that your suggestion that Hussman should be evaluated over a 10 year period accross bull and bear markets is inconsistent with his prospectuses general claim that he can identify favorable and unfavorable markets - see his 4 sectored matrix.

His matrix showing his posture has a full 3 out of 4 postures which would do great in a bull market:

1. Aggressive
2. Moderate
3. Positive
4. Hedged

And 1 of them would even outperform (aggressive).

If you care to read his prospectus (www.hussman.net/pdf/hs...) you will see that he arrives at one of the 4 postures by evaluating two variables for being favorable or non-favorable:

1. market action
2. valuation

Using Mr. Hussman's own presentation in his own prospectus in light of the recent long and dramatic underperformance, you must assume that he has generally (if not completely) been in a "hedged" position. This is really a simple conclusion because any of the other 3 (aggressive, moderate, positive) would have generated near market performance, if not better.

Following along, you must conclude that he concluded that both the "market action" variable and the "valuation" variable were unfavorable - this is the only way to get into the "hedged" box in his prospectus presentation.

Not only was Hussman wrong in retrospect, but it is clear that the "market action" variable for the past 4 years would only reasonably be called "favorable". And if you believe this general idea, you can further see that according to Mr. Hussman's own prospectus, there are only two options for his posture depending on the valuation variable: aggressive or positive.

Assuming he viewed valuation as unfavorable, he would be in the "positive" box.

Now if you've followed this carefully crafted argument to this point without shedding tears for your underperforming compatriot Hussman, you would understand that his dreadful performance can only be explained by being in the "hedged" box based on unfavorable valuation and unfavorable market action.

Anyway, it logically follows that Hussman has either not followed his mandate and deceived investors OR he has simply failed in money management skills. Of course it could be a combination of a deceptive prospectus and an unskilled manager as well.

Why do you not want Hussman's failures exposed ?

John.

P.S. Tell us where he was in his 4 sectored box, what he must have thought about the market action and valuation variables, and whether his conclusions were reasonable and/or correct.

In the end Hussman put himself in a box in his prospectus and he can't get out.

There is simply no way that one can reasonably conclude that "market action" variable was anything but positive the past 4 years........and this puts Hussman in the "positive" or "aggressive" position with respect to equities - yet it is clear that Hussman was somewhere else.

And while Hussman was somewhere else, investors were paying him alot of money to do the right thing.

He failed. Simple as that.

[<em>Edited for offensive content</em>]

[JohnnyBitchdog]

Looking more closely at Hussman's prospectus:

The Fund’s portfolio will typically
be fully invested in common stocks favored by Hussman Econometrics Advisors,
Inc., the Fund’s investment manager, except for modest cash balances that
arise due to the day-to-day management of the portfolio.

I am actually persuaded that Hussman could be guilty of not following his mandate as described in the prospectus.

The best court of law is probably redemptions but if you look at his investing matrix coupled with his claim that it's typically fully invested, it's clear that there is a big-time failure here.

Choose your poison, Hussman:

Either you didn't follow your mandate (shame on you, that's wrong and possibly illegal)

OR

Your cronies at Hussman Economic Advisors don't know how to pick stocks

Which is it ?

John

P.S. Any of the cronies want to continue to make claims that Hussman's performance can be explained by the mandate ? Pathetic.

[JohnnyBitchdog]

I have taken an even closer look at Hussman's mandate for his underperforming Strategic Growth fund.

Take a look at this statement from the prospectus:

Historically, different combinations of
valuation and market action have been accompanied by significantly different
stock market performance in terms of return/risk. The investment manager
expects to intentionally “leverage” or increase the stock market exposure of the
Fund in environments where the return from market risk is believed to be high,
and may reduce or “hedge” the exposure of the Fund in environments where
the return from market risk is believed to be unfavorable.

These are very interesting statements from Mr. Hussman's fund prospectus. Here is my take:

1. The first statement regarding historical market performance cannot be backed up by any serious research or regression analysis against measurable data.

2. There is a clever linking of this market babble to the next statement which is intended to distance Hussman from any legal liability which may result from professional incompetence:

Notice the interesting language regarding when the investment manager will hedge......from this mandate it is when "the returns to risk are BELIEVED to be high" !

This is interesting because if you read the first part of the statement, you are given the impression that there is an approach which is based on metrics and historical data (generally it appears to be nonsense to me but it gives the impression). And then you read that the actual approach is based on the investment managers " BELIEFS".

Of course questioning Hussman's "BELIEFS" is much more difficult than questioning a real market model and actions dictated by the model.

I don't know whether this lawyerly language immunizes Hussman from charges of professional incompetence with respect to this fund, but make no mistake about it:

1. This prospectus suggests that there is a model which Hussman uses to determine whether market conditions are favorable or unfavorable accross 2 dimensions (market action and valuation)

2. The lawyers have cleverly inserted the language "beliefs" in order to immunize Hussman from using a model which can be inspected in terms of whether he used it properly, or at all. (Note: this is my opinion and not fact)

3. If you view 4 sectored matrix, it is clear that Hussman is only expected to be in a hedged position when market action and valuation variables are determined to be unfavorable. One might say this should occur 25% of the time on average though we really don't know the distribution of the variables....reasonabl... way to start a default evaluation

4. Given the market trajectory over the past several years, it is very hard to conclude that Mr. Hussman's "market action" variable could have been showing "unfavorable"... for much of the period. Certainly it is fair to assume this variable was more favorable than unfavorable the past 4 years.

5. If you accept this analysis, Hussman would have to have generally been in the postures he describes as "aggressive" or "positive" in his prospectus.

6. And yet, the massive underperformance could only be explained if he were in the "hedged" part of the matrix. And even then you could surmise that the level of the underperformance is even worse than one would expect with a general hedging approach which is supposedly no less than market neutral.

In the end we must conclude that Mr. Hussman failed in his mandate for the last 4 years or so.

All of the arguments about looking at a full cycle have nothing to do with holding Mr. Hussman accountable to the assertions in his prospectus.

Of course if you try to hold him accountable to those assertions, his lawyers have protected him by claiming that he hedges when his "beliefs" tell him to do so.......rather than when a reasonable and tested model tells him to do so.

So, Mr. Hussman has followed his beliefs and failed.

The sad thing is that Mr. Hussman's prospectus implies that some kind of historical model could be used as guidance. This was probably just marketing rather than a real model, and since it is his "beliefs" that are important as far as his lawyers are concerned, he is well protected and can keep his excessive compensation in exchange for his failed beliefs.

The lesson: Don't pay PhD's for their beliefs. These guys like to fiddle around and sound smart, but in the end Hussman adds no more value than Joe Six Pack. In fact, JSP's "beliefs" about the world might well be much superior to Mr. Hussman's.........

And investor suffering in his "Strategic Growth" fund is the most current evidence to that possibility.

John.

P.S. While I would not trust Mr. Hussman to manage my money, and would encourage other investors to question whether he deserves his paycheck, I do have one positive thing to say about his background:

Go Blue. May the Wolverines never have to suffer 4 seasons of vast underperformance based on false premises and beliefs such as:

1. We don't need to change our gameplans from game to game or season to season.

2. The first 3 minutes of the second half is an appropriate time to begin protecting and 8 point lead.

3. Running is more important than passing even when you have a great QB and great receivers.

Maybe Hussman is just the Lloyd Carr of money management - the game has just passed him by.

[JohnnyBitchdog]

I don't suppose we'll hear much from the phonies that suggested that Hussman's SG fund was performing according to it's mandate and prospectus.

Clearly it has failed and there are some serious questions that Hussman and his Hussman Econometrics stock pickers should answer:

1. Your prospectus claims that you are able to identify favorable market action from unfavorable market action.

What went wrong the past 4 years ?

Would you now concede that you don't have a clue about the market's future based on your phony favorable/unfavorable action indicator ?

2. Any numbskull can look at the past 4 years of "market action" and determine that it looks pretty good in retrospect. How is it that your indicators - you know, the fancy ones you describe with really smart sounding b.s. in your prospectus - failed to identify the favorable market action ?

3. Even if your other variable, valuation, described in your prospectus was unfavorable, your prospectus claims you would either be taking a "positive" or "aggressive" stance toward equities (even when your valuation variable suggests overvaluation).

Is your underperformance consistent with taking either a "positive" or "aggressive" posture ? I don't think so.

4. Assuming you were simply wrong about your ability to understand favorable vs. unfavorable market action, are your returns consistent with simply being hedged ? I don't think so.

I am still inviting those that claim your fund is performing as expected according to your mandate to present some kind of explanation including a reasonable benchmark against which we should measure your underperformance. I doubt they will have much to say.

But if you want a simple understanding of how bad the failure at Hussman's fund really is, ask yourself this simple question:

If I asked Hussman 4 years ago how his "Strategic Growth" fund would perform in an equity market which rises 100%, what do you think his answer would be ?

Most likely it would be that his fund would get at least that return, and if you believe his questionable prospectus that suggests he can identify favorable market action, you really should conclude that it would perform better than the market (see sectors called "positive" and "aggressive" in his prospectus).

Even in a worst case scenario this fund, as described in the prospectus should not wildly underperform as it has. Worst case investors should have attained 50% of the market returns assuming that Mr. Hussman wrongly decided to be in his "hedged" sector.

In reality it gained less than 20% of the equity returns.

This jury is out: No Value Added, Hussman.

The comedy of the argument is that Hussman's own prospectus claims that his fund has a way of identifying favorable and unfavorable markets giving the impression that performance would be reasonable even in an unfavorable market. The impression for a favorable market which has occurred is that performance should equal or exceed the general equity market.

Why do so many fools wish to come to the defense of overpaid, no value added fund managers ?

Answer: chances are that they are not fools......just biased in some way or another.

Any thoughts out there ?

john.

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[MDCigan]

"Any thoughts out there ?"

Yes, you have way too much time on your hands, and need to get a hobby or some social activity besides the enormous amount of replies you post on this website. You do realize that with Hussman and Ritholtz they aren't likely reading your responses any way. You are just arguing with yourself in an empty room.

I'd spend the time to discuss some of your points (and I actually think you have a legitimate point on the "market action" issue, I too wonder why he was fully hedged most of the last 3 years even if valuations were high), but my time is too valuable to go back and forth with you on this issue.

Best of luck to you in your investing.

[Paul S C]

Spot on above. I am exhausted just thinking about how Mr. Lewing spent his weekend.

Perhaps his foresight is 20/20, just like his (and everyone else's) hindsight. Perhaps he has all this time because he knew the bull market was going to last this long and rode it all the way to an early retirement. Perhaps he did the same thing in the late nineties and got out at the exact moment that the final straw came down on the camels back. Perhaps he is writing all these, somewhat obsessive, emails from his hammock in the British Virgin Islands, Mojito in one hand, Hussman prospectus in the other. Perhaps.

[JohnnyBitchdog]

Yes, your time is no doubt valuable and mine is cheap.

I don't suppose you just realized that silly baseless chit chat was going to win this argument.

Bottom Line: There is really no way to argue that Hussman has met his mandate, and the mandate as described in Hussman's prospectus is probably just deceptive b.s. anyway. I don't think Hussman used any systematic approach to determine his "market action" or "valuation" variables, and I think his 4 sector proposition is phony load of crap- I'd like to see this clown show his methods in a court of law.............

But, as we know, his lawyers (or he personally) protected himself by dovetailing the prospectus discussion away from the phony proposition that he knew how to identify favorable/unfavorable markets and into........you guessed it: Mr. Hussman's Beliefs !

Save it for the church, Hussman.

You don't deserve to be paid for your beliefs as your performance record clearly shows.

john.

[gembree]

No comment to most of that, but I would remark that Hussman documents his reasoning weekly, archived to 2003; he is one of the most transparent managers around. All you have to do to find out why he was X% hedged on date Y is look it up and get a several-paragraph explanation. Alternately you can write pages and pages of speculation based on incorrect assumptions, I guess.

[JohnnyBitchdog]

Gembree -

Feel free to insult me and my perspective on Hussman's failed fund.

While you are doing that, please understand that following:

1. My analysis uses Mr. Hussman's mandate as described in the prospectus for his fund.

2. Mr. Hussman's mandate says nothing about managing the fund according to his meandering commentary about the stock market.

3. What the prospectus does say is that Mr. Hussman has a system of determining 2 variables for whether they are favorable or unfavorable (market action and valuation).

4. What the prospectus does say is that his fund will typically be fully invested in equities identified by Hussman Econometrics

5. What the fund does say is that approximately 25% of the time (not explicitly but based on his 4 sector matrix) he will be "hedged". this occurs only when both market action and valuation variable are unfavorable.

6. It doesn't take a genius to understand that Mr. Hussman's system of determining whether market action was favorable or unfavorable failed miserably.

7. Even if Mr. Hussman had declared (wrongly) that both market action and valuation were unfavorable the past 4 years, it is very difficult to reconcile the underperformance of his fund.

Is it reasonable that Mr. Hussman underperforms equities by 8:1 when he is in the "hedged" position ?

Answer: No, it is not reasonable and that's how the performance stacks up the past 4 years.

It seems to me that the failure is quite evident.

Lastly, I just didn't see anything in Hussman's prospectus saying "keep an eye on my market chit chat" so that you will understand how I am investing your money.

The mandate is in the prospectus, and is a legal document.

Choose your poison:

Hussman's money management skills were negative value added the past 4 years

OR

Hussman did not manage to his mandate

In one case you can question his professional skill; In the other his ethics.

My reading of his prospectus suggests that he falsely implied that he had a reasonable system of determining "market action" and/or "valuation" variables.

It is also possible that Hussman Econometrics took value away by failed long stock picking.

My pages of pages are directly related to Mr. Hussman's prospectus and claims therein.

Your suggestion to re-read Mr. Hussman's market chit chat is just stupid. Frankly that's one of the reasons that investors get burned - they see a PhD in a tie with a friendly smile and they think he can add value.

If you are someone who pays folks like Hussman, I encourage you to lose the delusion that they earn their paychecks.

John.

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