This week we visit some very thoughtful analysis by an old friend of Outside the Box, Dr. John Hussman of the Hussman Funds (http://www.hussmanfunds.com/index.html). Is it 1932? Are we in a Depression? Where is the bottom? John gives us a very balanced view and actually offers some positive insight on the markets. There may be light ahead.
(Note: there is a chart from Ned Davis Research that is, as John notes, not to be distributed further. I did call Ned Davis Research and they graciously gave me permission to use it as well.) Have a great week, and enjoy some positive thoughts below.
This week we are going to do something unusual for Outside the Box. Normally I take an essay and send it to you to read. Today I am going to give you a link and strongly suggest you click to it. Long time readers are familiar with friend and comrade James Montier, who along with Albert Edwards, migrated to Societe Generale earlier this year. They are co-heads of Global Cross Asset Strategy and based in London.
Kate Welling does some of the best interviews anywhere in her Welling@Weeden letter, and this one of Montier and Edwards is typical of her immensely enjoyable style. She gave my good friend Prieur du Plessis permission to reprint the letter, and I provide you with a link to his blog and if you scroll down 6 short paragraphs you get the link to the letter, which includes the graphics and is much more fun than just me cutting and pasting. You can also subscribe to Prieur's blog if you wish. Once a week he provides a very useful review of what was written the previous week.
Montier and Edwards speak quite forcefully about the problems they see in the market today, and they are truly Outside the Box thinkers.
"They are, in a word, skeptics, and at this juncture most deeply skeptical of any and all notions that 'the worst is over.' The recession, which has barely begun, is more likely to be deep than shallow, market valuations are hideously expensive and the -flation policymakers should be worried about starts with de-, not in-. For their reasons, keep reading, if you dare."
And no, despite the picture, they are not twins separated at birth.
What does a bubble look like and how do they end? In this week's Outside the Box, James Montier of Societe Generale in London looks at not only the psychological analysis, but also at the propensity for commentators to continually proclaim the end of the problem and a resumption of business as usual. He includes a fascinating piece from Marc Faber documenting the various quotes about how well the economy was doing from 1928-32. This makes for fun, if a little sobering, reading.
To quote from his summary:
"We have seen the heads of virtually all financial institutions stand up over the last few months and claim the worst is behind us. Why would anyone listen to these people? They didn't see the disaster coming, and yet somehow they are qualified to tell us it is all alright! Perhaps I am just unduly sceptical, but this reeks of a conspiracy of optimism. The recession has barely started, let alone reached its nadir. The market moves of late have all the hallmarks of a classic sucker's rally. This isn't discounting the recovery, this is denial! Far from being behind us, the worst may well still be ahead!"
I think you will find this letter very interesting.
Is the market over-valued? In this week's Outside the Box, one of my favorite global equity analyst's (and no stranger to regular readers), James Montier of Societe Generale does some very interesting analysis on the European and US markets and finds the number of stocks which make his list as possible for being a "short" is at very high levels. This is a remarkable read and re-enforces my view that we are in a "sell in May and go away" summer. This is really a great Outside the Box. Enjoy.
This week I take great pride and pleasure in being able to bring you a recent letter from my very good friend Peter Bernstein. I asked him to let me publish this, as I think this is one of the more important, thought-provoking pieces I have read in a very long time. I am grateful for that permission, as you will be when you read this. I would take the time to read it through several times. Read this paragraph from the beginning of the letter to get an idea of the thought path down which Peter is going to take us:
"As Goldilocks shreds, we have to start thinking about what kind of long-term environment is going to replace it. Shifts to new environments are always attenuated. They are also rare across time, which means most of us have limited experience with this phenomenon. New environments often tend to sneak up on us and do not announce themselves with a fanfare. Most of us are unaware of what has happened until enough time passes to provide good perspective."
Peter argues persuasively that we are getting ready to enter a new economic and investing environment as profoundly different as the 80s were to the 70s. As I said earlier, take your time and think through the implications of his thoughts.
Peter writes Economic and Portfolio Strategy and has done so for decades. He has won numerous honors, edited some of the most prestigious financial journals and has been at the center of economic thought for six decades. At 87, he is still writing material that makes those of us who are his junior simply stand in amazement and applaud. His book, "Against the Gods - The Amazing Story of Risk" - is on my list as one of the five most important books on economics and finance. You can get it a Amazon.com. And while you are there, get his latest book, "Capital Ideas Evolving" or the important "Power of Gold."
For those interested in his letter or more information about Peter, you can go to www.peterlbernsteininc.com.
This week in Outside the Box John Hussman of The Hussman Funds strives to shed light upon the tumultuous and perplexing state that is the stock market. Having metaphorically, as in the Greek tale, driven by curiosity, opened Pandora's Jar (Box) of financial fantasy and unleashed the evil that has come to pass in the guise of subprime, all that remained was hope. Hussman intertwines hope with caution as we venture into the new year.
Will the market rebound this week or continue last week's slide? Will the credit markets stop their turmoil? These are all questions that investors are confronted with by the financial press. In today's "Outside the Box," we will focus our attention on a well-thought out piece by John Hussman, Ph.D. John is the President of Hussman Investment Trust where he manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
In his Weekly Market Comment, John addresses the recent market volatility and puts it in historical perspective, comparing it in duration to that of previous market cycles. We have currently gone almost 1200 days without a 10% correction, the second longest such period on record.
So, how does a money manager with these views cope in today's market? I keep John's comments about what he is doing in his fund so you can see what this highly regarded professional to hedge his bets. I think you will find what he is doing to be instructive.
While most investors continue to watch their streaming ticker for new record highs, we are patiently waiting for the raw data to form our investment decisions. I believe you find this commentary to be both valuable and "outside the box."
Today I am pleased to present to you a very thoughtful piece by John P. Hussman, Ph.D., President of Hussman Investment Trust. John manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX, where his investment style is more that of a hedge fund than a traditional mutual fund because of his hedging tactics and absolute return philosophy. According to Morningstar, the Hussman Funds have been some of the better performing mutual funds over the past 5 years.
In his weekly market commentary, John explains why he thinks the markets are caught up in the trivial in the midst of a low stakes environment. He further goes on to discuss the current investment climate and its implications for the risk-averse investor. With the current bull market already past the median duration of past advances, I share some similar concerns with John regarding valuations in the marketplace (I touched on these concerns a couple weeks back in my article titled "Fingers of Instability," which can be viewed here).
I trust that you will enjoy this mentally stimulating piece and find it to be another valuable "Outside of the Box" contribution.
This week's letter is from John P. Hussman, Ph.D., President of Hussman Investment Trust. John manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX and writes his Weekly Market Commentary.
Following are two recent Weekly Market Commentaries that touch on contrarian investing and price movements in the markets. Last week, James Montier told us that to succeed in investing you need to take a contrarian approach, but Hussman says "not so fast," and that always being contrarian may not be the best idea. Sometimes it is a good idea to go along with the crowd.
In the second part, Hussman explores a common belief, seen everyday in the media, that money moves into and out of the markets. However for every seller there is a buyer and the movement of markets is based on perceived value rather than money flows. As always Hussman has some interesting insights and that is why these were picked for this week's Outside the Box.
This week's letter is from John P. Hussman, Ph.D., President of Hussman Investment Trust. His firm is one of the few that has employed hedging techniques, similar to the hedge fund world, in a mutual fund structure. John is also one of the really, really, really smart guys in the running money business. John manages the Hussman Strategic Total Return Fund - HSTRX and the Hussman Strategic Growth Fund - HSGFX.
Hussman's Weekly Market Commentary on March 21, 2004 takes a look at the importance of dividends to long term returns. Many readers know that in my past letters and book I point out the role dividends play in the total return to investors. Equity valuations are high and dividend levels are low so the buy and hold market cheerleaders, who trot out their long term average market return studies, won't help you much unless your time horizon is 70 years.
This commentary does a great job of explaining the role of dividends and why equity returns may not be as high as the long term market average over the next 10-15 years and that is why it became this week's Outside the Box.