Hussman Weekly Market Comment: Apples to Elephants

Hussman Funds - Weekly Market Comment: May 30, 2006 - Apples to Elephants: "As for the long-term picture, the current reality is that stocks remain priced to deliver fairly unsatisfactory long-term returns to buy-and-hold investors in the major indices.
What is the long-term? Well, one way to think about that is to think about stocks as a claim on a long-term stream of future cash that will be delivered to investors. In the fixed-income market, a bond might deliver some of its interest payments in the early years, some in the later years, and finally a lump sum at maturity. The "duration" of a bond is basically the "average date" at which those payments come in (weighted by the proportion of the total bond value that's delivered at any given point). So a 10-year zero-coupon bond would deliver it's whole value at year 10, and so would have a duration of 10 years, while a 10-year, 6% coupon bond priced at par would have a duration closer to 8 years.

What's interesting about duration is that it's also the horizon over which you can best predict your future wealth (assuming you reinvest your interest or dividends), regardless of where the stock or bond market goes over time. That's why buy-and-hold investors should generally try to match the duration of their investments to the duration of their obligations. In effect, duration is the most appropriate definition of "long-term" in the sense of making the final value of a buy-and-hold investment relatively independent of the path that the market takes over time.

As it turns out, a good estimate of stock market duration is simply the price/dividend ratio of the S&P 500. That sounds like an implausibly magical fact, but there's a good amount of mathematics behind it (the February 23, 2004 weekly comment includes a detailed discussion on duration in the stock and bond markets).


Read the rest to find out the market's current 'duration'.

Hussman Weekly Market Commentary: Textbook Warnings

Hussman's dire warnings of the past two months certainly played themselves out last week. My portfolio dropped about 5% and it may be time to get defensive with respect to US equities.

Hussman Funds - Weekly Market Comment: May 22, 2006 - Textbook Warnings: "Among the simplest truths is that market risk tends to be unusually rewarding when market valuations are low and interest rates are falling. For example, since 1950, the S&P 500 has enjoyed total returns averaging 33.18% annually during periods when the S&P 500 price/peak earnings ratio was below 15 and both 3-month T-bill yields and 10-year Treasury yields were below their levels of 6 months earlier. Needless to say, there are a variety of ways to refine this result based on the quality of other market internals, but it's a very useful fact in itself.

The "canonical" market bottom typically features below-average valuations, falling interest rates, new lows in some major indices on diminished trading volume, coupled with a failure of other measures to confirm the new lows, and finally, a quick high-volume reversal in breadth (usually with an explosion of advances over declines very early into a new advance).

Similarly, market risk tends to be poorly rewarded when market valuations are rich and interest rates are rising. Since 1950, the S&P 500 has achieved total returns averaging just 3.50% annually during periods when the S&P 500 price/peak earnings ratio was above 15 and both 3-month T-bill yields and 10-year Treasury yields were above their levels of 6 months earlier. Again, there are a variety of ways to refine this result, but note that anytime the total return on the S&P 500 is less than risk-free interest rates, a hedged investment position increases overall returns (since hedging instruments are priced to include implied interest)."

Hussman Weekly Market Commentary: Stagflation!?!?

Hussman is fully hedged and worried about stagflation... read the whole thing.

Hussman Funds - Weekly Market Comment: May 15, 2006 - Yet: "The broad fundamentals - particularly an enormous current account deficit and reasonable prospects for stagflation - continue to be favorable for this group.

That reference to stagflation is based on two factors. First, historically, and internationally, it's not the rate of money growth per se, but the growth of government spending as a share of GDP (particularly spending that doesn't add to the productive capacity of a nation), that drives inflation pressures. Second, the enormous current account deficit means, by definition, that a substantial portion of U.S. gross domestic investment is currently being financed by foreign capital inflows. There are only two ways out of this deficit - invest less domestically, or save more domestically. Given a profligate fiscal policy and a low propensity to save among U.S. households (saving more requires income growth to outpace consumption growth), "saving more" is probably not a likely source of adjustment. More likely, we'll adjust a good part of the current account deficit through weakness in U.S. gross domestic investment (mostly via a housing slowdown, in my estimation). In any event, the U.S. has virtually zero likelihood of enjoying a sustained "investment boom" anytime soon - whatever growth we observe in capital spending is likely to come from a contraction in housing investment, leaving gross domestic investment relatively flat."

Doom and Demography

Doom and Demography: "For decades, the world has been haunted by ominous and recurrent reports of impending demographic doom. In 1968, Paul Ehrlich's neo-Malthusian manifesto, The Population Bomb, predicted mass starvation in the 1970s and 80s. The Limits to Growth, published by the global think tank Club of Rome in 1972, portrayed a computer-model apocalypse of overpopulation. The demographic doom-saying in authoritative and influential circles has steadily continued: from the Carter administration's grim Global 2000 study in 1980 to the 1992 vision of eco-disaster in Al Gore's Earth in the Balance to practically any recent publication or pronouncement by the United Nations Population Fund (UNFPA).

What is perhaps most remarkable about the incessant stream of dire - and consistently wrong - predictions of global demographic overshoot is the public's apparently insatiable demand for it. Unlike the villagers in the fable about the boy who cried wolf, educated American consumers always seem to have the time, the money, and the credulity to pay to hear one more time that we are just about to run out of everything, thanks to population growth. The Population Bomb and the Club of Rome's disaster tale both sold millions of copies. More recently, journalist Robert D. Kaplan created a stir by trumpeting "the coming anarchy" in a 2000 book of the same name, warning that a combination of demographic and environmental crises was creating world-threatening political maelstroms in a variety of developing countries. Why, of all people, do Americans - who fancy themselves the world's pragmatic problems-solvers - seem to betray a predilection for such obviously dramatic and unproved visions of the future? "

Hussman Weekly Market Commentary: Avoiding the Big Loss

Hussman Funds - Weekly Market Comment: May 8, 2006 - Avoiding the Big Loss: "Here's a historical fact that I don't recommend as a timing tool or investment strategy, but is true nonetheless. Had an investor sold the S&P 500 index anytime it reached a price/peak earnings ratio of 19 (i.e. 19 times the highest level of earnings achieved to-date), and then simply sat in Treasury bills, possibly for years, reinvesting in stocks only when the S&P eventually declined to 14 times earnings, that investor would have captured the entire historical return enjoyed by S&P 500, with substantially lower volatility and risk exposure.
Even easier, suppose that an investor sold the S&P 500 at 19 times record earnings, and just sat out of the market until the S&P 500 eventually dropped 30% from its prior highs (say, on a weekly-closing basis). Nothing more. Just sell at the first point of overvaluation and then sit around waiting for a plunge. That strategy would have placed an investor out of the stock market nearly 30% of the time, yet would have produced total returns of 13.03% annually since 1940 (versus 11.90% for a buy-and-hold approach), and 13.67% since 1970 (versus 12.96% for a buy-and-hold).
Now, one might say sure, but that's because you've eliminated several deep, unusual �outliers� like the �69-70 decline, the �73-74 plunge, the �87 crash, and the 2000-03 bear market. But that's exactly the point. All of those plunges had their origins in rich valuations."

New York TImes Standing-Up for Zarqawi's Self Esteem

Why is the New York Times bothering to discredit the video showing Zarqawi as a bumbling soldier in New Balance shoes?

Not All See Video Mockery of Zarqawi as Good Strategy - New York Times: "The weapon in question is complicated to master, and American soldiers and marines undergo many days of training to achieve the most basic competence with it. Moreover, the weapon in Mr. Zarqawi's hands was an older variant, which makes its malfunctioning unsurprising. The veterans said Mr. Zarqawi, who had spent his years as a terrorist surrounded by simpler weapons of Soviet design, could hardly have been expected to know how to handle it."

Why Isn't Socialism Dead?

Great article on Socialism... read the whole thing.

TCS Daily - Why Isn't Socialism Dead?: "Thus, in the coming century, those who are advocates of capitalism may well find themselves confronted with 'a myth gap.' Those who, like Chavez, Morales, and Castro, are preaching the old time religion of socialism may well be able to tap into something deeper and more primordial than mere reason and argument, while those who advocate the more rational path of capitalism may find that they have few listeners among those they most need to reach -- namely, the People. Worse, in a populist democracy, the People have historically demonstrated a knack of picking as their leaders those know the best and most efficient way to by-pass their reason -- demagogues who can reach deep down to their primordial and, alas, often utterly irrational instincts. This, after all, has been the genius of every great populist leader of the past, as it is proving to be the genius of those populist leaders who are now springing up around the world, from Bolivia to Iran.
This is why socialism isn't dead, and why in our own century it may well spring back into life with a force and vigor shocking to those who have, with good reason, declared socialism to be no longer viable. It is also why Georges Sorel is perhaps even more relevant today than he was a hundred years ago. He knew that it was hopeless to guide men by reason and argument alone. Men need myths -- and until capitalism can come up with a transformative myth of its own, it may well be that many men will prefer to find their myths in the same place they found them in the first part of the twentieth century -- the myth of revolutionary socialism. "

State sues feds, saying SUV mileage standards should be raised

Why don't these nanny states just outlaw SUVs altogether? Do they fear that their citizens might be a bit perturbed? "Let's just make the Feds do it... they'll do anything!"

State sues feds, saying SUV mileage standards should be raised: "California today launched its latest skirmish with the Bush administration over environmental rules, suing the federal government over SUV gas-mileage standards that the state considers too lax. "

2006 Annual May Day Communique From Laika

From the best satire site on the web... The People's Cube

Cube :: 2006 Annual May Day Communique From Laika: "Today Comrades, millions of socialists are taking to the streets of Amerika to advance the cause of the Welfare State! All borders shall be removed! The Mexicomintern Council has been working very hard with La Raza these past few months, blending fascism and socialism to come up a unique brand of progressive thought which is bound to destroy the Evil Gringo Bush and his capitalist knaves. Assimilation? No! Domination? Yes! Free stuff (hospital care) for everybody! We'll march today and get drunk on Friday, Cinco de Mayo! Even the Mexicans have kicked French Ass!"

ER Portfolio Performance - April 2006

April was a great month...

• April 2006 Return - 3.11% (versus 1.08% for the Russell 3000)
• Year To Date Return - 9.61% (6.45%)
• Last 12 Months Return - 18.50% (18.09%)
• 12 Month Standard Deviation - 2.3% (2.2%)
• 2/1/2001 through 4/30/06 Cumulative Return - 36% (11%)
• 2/1/2001 through 4/30/06 Annualized Return - 6.1% (2.1%)

My annualized compounded return of 6.1% is OK but my retirement nest egg isn't going to meet my needs on investment growth alone. What, you ask, could be more important than high investment returns? Well, if you're a working stiff like me and you don't have a trust fund, it's all about your propensity to save versus spend.

I looked at my net worth growth over the last 5+ years (the same period of the long term calculations above) and calculated its annualized compounded growth. I excluded any rise is the value of my home because I really didn't have anything to do with that... don't get me wrong... it's great - I just want to look at actual savings.

Here are the numbers:

• Total 63 month increase in net worth: 177%
• Annualized increase: 21.4%

So my investments returned 6.1% annually but my net worth increased 21.4% annually! The 15.3% difference is my ability to save. As my net worth grows, I doubt I'll be able to keep this frenetic savings rate at the 15+% level. It is, however, pretty compelling evidence that savings (at least for me) is dramatically more important that investment return when you are in the first 15 years of our earnings life.