We got our answer. The fund was down 0.25% on a day the market went up about 0.35%. That apparently reflects "a fairly neutral near-term outlook".
This board used to be pretty active, but I think investors were worn down and demoralized by an unfriendly management team that many people came to distrust. The forays into human nutrition always smelled to me - it didn't seem like mere incompetence or ego and I still think a deep investigation would uncover something. But at least we now have momentum and real money backing the interests of shareholders. Great news!
In yesterday's long winded comment Hussman wrote "Currently, enough trend-following components have improved on that front to hold us to a fairly neutral near-term outlook..." It'll be interesting to see what the NAV change is today while he is "fairly neutral".
In the good professor's latest missive he presents a familiar type of chart, this time showing the ratio of household financial assets to disposable income. It shows the ratio at a record high (*) of about 5.2 while the record low in the early 1980's was about 3.3.
He goes on to state "we expect the S&P 500 to retreat by 40-55%; a decline that would be merely run-of-the-mill"
But that statement is not supported by his data (as displayed in the chart)! If disposable income didn't change and the ratio plummeted from 5.2 to 3.3, that would represent a 37% decline on household financial asset value. However, if disposable income grew at a modest nominal 3%/yr for 4-5 years then the ratio could go to 3.3 with only a 27% decline in household financial asset value.
Now, the good professor would probably counter that he is talking about a decline in equities (**), not overall financial assets. And we know equities are more volatile than other financial asset classes. True, but then why is he using the overall financial assets metric as a correlation with future equity returns???
The key thing to note is that he again presents succinct data and some analysis but then slyly slips into #opinion#, using words like "expect" and "believe" (***)
* Going back to about 1950
** Specifically the S&P500 index
*** Here's a good example of him talking about what he "believes" back in Aug. 2009:
"If we had a reasonable basis to believe that the recent economic downturn was an ordinary run-of-the-mill post-war recession having no lasting structural impact, and believed that the record profit margins observed in 2007 (about 50% above the historical norm) could be recovered and sustained, we would... warrant the removal of a good portion of our hedges outright..."
The real professionals with teams of quants with supercomputers and the high frequency traders are certainly running circles around guys like Hussman. They see him coming before he even knows he's going to make the trade.
Hussman is going to get some relief from the British people! Funny, I don't remember him ever talking about geopolitical events as triggers for market declines. Better lucky than smart!
As I said, $400 wouldn't hold. CMG stock is clearly struggling to find footing and there just isn't enough sell-side happy talk to assuage the concerns of current holders. Rallies are being sold.
10%? Really, that would take us to about $350, where it would remain very overvalued. CMG is a couple of years away from even getting back to $15 EPS (at best). Slap a 15x multiple on that (for a damaged goods stock) and you've got $225. And it could be worse than that.
Yep, didn't hold long at all. I'm sticking with my call for next rebound around $350 (as part of a decline that takes us to the low $300s. If the overall market really gets nasty, then CMG could go 15x15 (15 P/E on $15 EPS hopes) = $225.
And I might add that under those conditions in four years the S&P500 at 1,500 (about 25% lower than today) would mean a then CAPE of 15. So your four year total return from today would be about negative 18%. Not pleasant, but certainly nothing to be so afraid of.
Is this what Mr. Hussman is trying to protect us from? Or is it the warrrrrry scarrrrry possibility that stocks might be down 50% from today's levels for a a period of a few months sometime in the next several years, prior to rebounding?
And starting two years from now, the depressed GFC earnings start dropping off of the CAPE calculation. Even if real earnings stay at today's levels (about 15% below the 2014 peak) and the S&P500 goes sideways, that will contract the CAPE to 23. Actually, if the nominal S&P500 stays flat while inflation runs at 2%/year with flat real earnings, the CAPE will drop to 21.
This is part of why Hussman needs a decline so urgently to save a shred of his reputation. He's fighting against the tide of data. Data that is locked and loaded.
Besides repeating more of the same, IMO Hussman does some really poor analysis in this week's commentary. Though Hussman deserves sharp criticism for several reasons, I still generally respect his analytical work and most of his presentations (even if he slips into data mining). This week's comparisons of DJIA losses against trailing two-year peak vs. (graph 1) average trailing two-year treasury bill rate and vs. (graph 2) yield change vs. against trailing two-year low are poor work.
First, the set up. He sets up treasury bill rates as a strawman argument. I haven't heard anyone talk about T-bills vs. stocks. The folks talking about sovereign yields vs. stocks are looking at 10-year and 30-year rates.
More importantly, his premise that the strawman would argue for strong stocks in the face of sharply falling rates is laughable. Can he cite anyone who has claimed that falling T-bill rates are good for stocks in the near-term? It seems obvious that declining T-bill rates are due disinflation or due to deteriorating economic fundamentals (recession).
Then there is the use of nominal rates going back to 1929, when we were on a gold standard. The data set includes many years of deflation and a wide range of inflation rates. Hussman can make arguments all he wants defending nominal analysis. In some cases, his use of nominal prices is justified. This isn't one of them. Real rates matter. Using nominal rates here creates noise.
They should have used EBIT instead of EBITDA for that comparison, because capital intensity and depreciation schedules may have shifted meaningfully across that time period.
That said, it's the good perspective on the market and I do actually agree with Hussman's response in the article, namely that if you're going to talk median profit margins, then you ought to talk about median valuations.
The problem with the financial media and sell-side Wall St. is that they reliably play games of bait and switch. They'll talk about historical P/Es and then talk about forward P/Es based on operating earnings. They'll talk about median company profit margins, but then review the S&P500 forward P/E. They'll talk about the inflation risk to bonds, but then imply that past nominal returns during high inflation periods should apply today in a low inflation world. Etc.
I've posted my thoughts elsewhere regarding why Hussman's approach cannot deliver a superior returns for a unit of risk (*). His terrible performance during the past couple years probably boils down to simply the cost of hedges in a nearly flat but slightly uup market (**). His models are "flashing red" or something like that and so he is out there buying and selling stocks and buying puts and selling calls. The purchased puts are expiring worthless because the market isn't down. The calls sometimes expire worthless, but there has been enough of an upward bias during most periods that he probably has to cover many of those.
He may also be a bad stock picker / his model is putting him into the wrong sectors.
* Summary: History rhymes, but it does not repeat; markets can stay irrational longer than you can stay solvent; a tiny shop with relatively simple models cannot compete with hundreds of large shops full of PhD mathematicians and savvy investors.
** And trading fees and fund management fees.
Long time readers will love the sentence regarding "our inadvertent difficulties in the half-cycle advance between 2009 and mid-2014" Well, I suppose it is correct to describe self-generated difficulties as "inadvertent", because one does not intentionally cause oneself difficulties. But using simpler terms like "mistakes" would convey more meaning.
I wouldn't say, because I can't predict the market. This fund looks pretty close to a straight short of the market, so 7.72 in June would be roughly a 3% increase in the S&P 500. Sure, your guess is as good as mine (and Hussman's!)
At this point he's dug himself a hole so deep all he can do is double down, put on a straight face, and pray. Some might call it a "con" at this point.