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John Hussman: Betting on a Bubble, Bracing for a Fall

Recs

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July 26, 2010 – Comments (7)

John Hussman of www.hussmanfunds.com puts out a Weekly Market Comment (which I highly encourage you to read every week). Per usual, this is another good article. This WMC discusses most importantly the ECRI data, and the fact that contrary to most claims, there is a substantial downturn in the index, not simply a slowing of the growth rate. This, taken with other leading economic indicators, is the reason why he issued a recession warning. The combination of indicators have only ever been seen during or just before the onset of a recession. Hussman also discusses current overvaluation of equities. This line here is a gem:

"We certainly know of many valuation indicators that suggest that stocks are "cheap" here. Unfortunately, they don't demonstrate any reliability in historical tests. It is almost mind-numbing to observe how many analysts confidently make valuation claims about the market on CNBC, evidently without ever having done any historical research. If you don't require evidence, you can say anything you want. "

Priceless :)

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Betting on a Bubble, Bracing for a Fall
July 26, 2010
John P. Hussman, Ph.D.

http://www.hussman.net/wmc/wmc100726.htm

[excerpt]

The financial markets are in a bit of a fight here between technicals and fundamentals. On a technical basis, a variety of widely-followed trendlines, moving average crossings, and resistance areas converge on the 1100 area for the S&P 500. Market internals have also firmed somewhat during the rally in recent weeks, suggesting that investors are eager to re-establish a speculative tone to the market. At the same time, fundamentals are bearing down hard on the market. We continue to observe a clear deterioration in leading indicators of economic activity.

Over the short-term, my impression is that the technicals may hold sway for a bit. The economic data points simply do not come out every day, and to the extent that economic news is not perfectly uniform in its implications, the eagerness of investors to speculate can easily dominate briefly. We established enough contingent call options at lower levels that we've now got about 1% of assets in roughly at-the-money index calls - a modest "anti-hedge" that removes any concern we might have about a frantic short-squeeze if the S&P 500 moves materially above 1100. At the same time, the historical evidence suggests that fundamentals have ultimately trumped technicals when we've observed similar warnings from economic indicators in the past. My impression is that the economic cold water could hit investors very abruptly, so that gains achieved over several weeks may be suddenly erased in a matter of a few days.

My basic concerns are the same here. Investors who will need to fund specific expenses within a short number of years - retirement needs, tuition, health care, home purchases etc - should not be relying on a continued market advance. If your life plans would be significantly derailed by a major market decline, get out. In contrast, if you are pursuing a disciplined, long-term investment strategy, and you know from your own experience of the past decade that you are diversified enough to ride out periodic losses without abandoning that strategy, ignore my views (and those of everyone else) and stick to your discipline.

The evidence from our Recession Warning Composite is already on the table, and would strengthen considerably if the ISM Purchasing Managers Index declines to 54 or less (the ISM services index already dropped to 53.8 last month). Again, no indicator in our composite is decisive on its own, but the combination of factors has always and only been observed during or immediately prior to recessions. The ISM figures and employment numbers will be a focus of investors in early August, but while a 54 on the PMI would be informative from our standpoint, investors may not immediately recognize it as meaningful. Undoubtedly, the most timely indications of recession risk are based on composites of multiple indicators, which is one of the reasons I've focused recent comments on the ECRI Weekly Leading Index (WLI). Last week, the growth rate of that index slipped again, to -10.5%, which we've never observed outside of actual or oncoming recessions, though the ECRI notes that there are two unpublished data points in the early post-war years that weren't associated with recessions.

I should emphasize, contrary to what some analysts have asserted, that this is not simply a "slowdown in the growth rate" of the WLI. To emphasize this point, I've presented three charts below (the ECRI makes this data publicly available at no charge on its website). The first is the level of the ECRI Weekly Leading Index. Not the growth rate - the level.

7 Comments – Post Your Own

#1) On July 26, 2010 at 11:49 AM, Griffin416 (99.98) wrote:

For those who did not click, those charts in the link are impressive and compelling.

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#2) On July 26, 2010 at 12:00 PM, binve (< 20) wrote:

Griffin416 ,

Thanks! I agree, Hussman is quite thorough in his analysis and he puts together a compelling argument..

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#3) On July 26, 2010 at 12:41 PM, IIcx (< 20) wrote:

Thanks binve - excellent article as always.

The 3rd para from the excerpts jumps out at me and reinforces the TMF approach to long term if you're in the position to ride out the transition with great stocks and not ETFs.

The volatility will drive the value of out-performers and we're about to head into a significant phase of technology transfer. Here's an example:

 

Personalized Energy -- Balance of Systems in Depth

http://www.youtube.com/watch?v=KTtmU2lD97o&feature=player_embedded

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#4) On July 26, 2010 at 2:07 PM, IIcx (< 20) wrote:

So, assuming you spent the time to review the link you are now at the point of realization -- TA CAN NOT account for the logical change we are about to enjoy.

The glass is now well over-flowing, its simply a matter of time for consumers to re-dress it with a "WHY". 

Can't say I'd be a buyer of energy stocks at this point yet it depends on the choice.

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#5) On July 26, 2010 at 2:43 PM, IIcx (< 20) wrote:

Or, perhaps a few episodes of Dr. Who -- confusion is as confusion does in Energy?

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#6) On July 26, 2010 at 2:46 PM, binve (< 20) wrote:

IIcx ,

Thanks.

>>The 3rd para from the excerpts jumps out at me and reinforces the TMF approach to long term if you're in the position to ride out the transition with great stocks and not ETFs.

I think this next phase will be a stock pickers market. I think the general trend is down, but there will be outperformers and even nominal gainers.

>>So, assuming you spent the time to review the link you are now at the point of realization -- TA CAN NOT account for the logical change we are about to enjoy.

Maybe. But I think EW can and does. I don't mean the century of doom described by Grand Supercycle 4 (which I don't buy). I am a 5-10 year bear, but a 'rest of my life' bull. This is why I wrote this post, especially the end: http://caps.fool.com/Blogs/why-i-hold-gold-why-i-am-a/402614.

I think after we clear all this bad debt (the problem is fundamentally too much debt. Not the fact that civilization is doomed or that the world is on balance full of bad people), which takes a few much years with (hopefully) a few fundamental political changes along the way, then we can put mankinds ingenuity and brillance to solve the global energy and water (and as Nocera points out, they are coupled) problems.

I think humanities best years are ahead of us, not behind us. Just not the next 5-10. My $0.02..

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#7) On July 26, 2010 at 3:08 PM, IIcx (< 20) wrote:

"My $0.02.." -- mine to bro,

I've never been disturbed by "Dreams" but the reality is the "Dreams of Money Changers" -- the history of "human"...

...maybe I'm missing the [?} opportunity? 

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