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.
As close as you can get and not be spot on! Then again, it was pretty much in the bag based on the losses when you posted vs. the prior day's performance.
This post from March 9, 2009 pretty much sums things up. It is something any prospective investor in the Hussman Funds should read. (Though Hussman is fond of quoting passages from his past commentaries, I don't think he's every quoted this one.)
"I suspect that the markets are about to get volatile.."
"...our investment stance has to be characterized as defensive."
He does recognize that "...over the course of a 7-10 year holding period, I do expect passive buy-and-hold investors in the S&P 500 to achieve total returns somewhat above 10% annually."
But "My impression is that only prices that allow no room for error (what Ben Graham used to call a “margin of safety”) will be sufficient to prompt robust, committed buying from value investors. This will be a fine thing for investors who keep their heads, are already defensive, and have the capacity to add to their investment exposure on price weakness, but other investors are likely to be shaken out of long-term investments at awful prices."
So his analysis showed a strong buying opportunity but he had an "impression" that there would be much lower prices.
You see, he knew that "...conditions have deteriorated significantly from even a few months ago..."
Mr. Hussman himself summarizes it beautifully in his most recent weekly letter "I never hestiate to acknowledge that my insistence on stress-testing our methods of classifying market return/risk profiles against Depression era data, following a financial crisis we fully anticipated, led to a difficult and awkward transition from 2009 until mid-2014 when those challenges were fully addressed"
Let. That. Sink. In.
It took OVER FIVE YEARS - while collecting a salary and money management fees - to "fix" his model. This seems like an admission that he was not up to the task and did not have the tools developed to deliver what he represented to investors during the first 15 years he was running the fund!
To me this help highlight what I and others have discussed here:
1) Hussman Funds is a small shop. It is dwarfed in size and access to resources by many thousands of competitors in the market.
2) Without peers and superiors to discipline him and hold him to account, he has only his own ego and capabilities to guide him. This is not enough.
3) Tune your models on somebody else's dime, pal!
The Hussman Funds have no leverage and that is the huge difference with LTCM. The idea of LTCM was to employ huge leverage to amplify small, but predictable and "safe" supposed arbitrage bets (based on all of that fancy math correlations and such). So unless there is a regulatory reason or the NAV shrinks so small that fees can't cover costs, he can hang on. In fact, he could choose to pump his own money into the fund management / advisory to keep it afloat, theoretically (and subject to any regulatory constraints). It's also possible that their is a board of directors that could force him to close the funds if they came to a conclusion that the funds cannot meet their stated objective. Other than that, he can keep plugging along, pulling at his sweater threads as he pounds his keyboard weekly for his lengthy commentaries...
I've noticed CMG trading in the opposite direction to the overall market. This is an indication that participants see CMG trading in a range. So on "risk-on" bullish days, traders dump CMG to play for upside. On "risk-off" days, traders jump into CMG as a place to park capital but stay in stocks.