Monday, July 31, 2006

Hussman Weekly Commentary: Anatomy of a Punch Line

The punchline is that the economy and the market are due for a sustained downward trend. Hussman is bearish and, once again, I hope he's wrong.

Read the whole thing.

Hussman Funds - Weekly Market Comment: August 31, 2006 - Anatomy of a Punch Line:

"As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action, holding the Strategic Growth Fund to a fully hedged investment stance. On a shorter term basis, the market is again overbought. There are few times that I have any sort of opinion about short-term market action, but overbought conditions in unfavorable Market Climates (and oversold conditions in favorable Market Climates) are among the exceptions.

Some of the worst market outcomes on record have followed on the heels of overbought rallies in periods when both valuations and the overall quality of market action have been unfavorable. In my view, Friday's rally on a distinctly stagflationary GDP report represented a good opportunity to do some lightening up of stock market exposure for investors who have not already done so, and would not easily tolerate a decline of 30% or so in the major indices."

Sunday, July 23, 2006

Hussman Market Commentary: Independent Thought

Hussman Funds - Weekly Market Comment: July 24, 2006 - Independent Thought: "It continues to astonish me how much power investors appear to ascribe to the Federal Reserve. The institution can do nothing but purchase debt (mainly U.S. Treasuries) and pay for it by creating bank reserves, or sell debt and receive payment by reducing bank reserves. When you realize that the total volume of bank lending has virtually no link at all to bank reserves (since the majority of monetary aggregates other than checking accounts have had zero reserve requirements since the early 1990's), and that foreign purchases of U.S. Treasuries have swamped Fed activity in Treasuries three-to-six times over in recent years, this whole focus on every word, syllable, and inflection from the Federal Reserve is just preposterous."

Monday, July 17, 2006

Hussman Weekly Commentary: Tornado Warnings

Hussman Funds - Weekly Market Comment: July 17, 2006 - Tornado Warnings:

"In short, until we observe an improvement in the quality of internal market action (which we don't observe here) we shouldn't be surprised to see news - economic as well as political - having a generally negative tone.

For example, since the 1960's, when our measures of market action have been favorable on balance, the ISM purchasing managers index has increased an average of +0.46% over the following month. In contrast, when market action has been unfavorable, the index has declined an average of -0.68% over the following month. Likewise, surprises to the prevailing inflation rate have averaged -0.23% when market action has been favorable, and +0.30% when market action has been favorable. Similar results hold even if we lag the news by an extra month to ensure non-overlapping periods.

We also know that news affects sentiment measures such as consumer confidence and the percentage of bearish investment advisors. These measures give us "summary statistics" of the various concerns influencing consumers and investors in a given month. Historically, when internal market action has been favorable, consumer confidence has increased by +0.64% over the following month, while unfavorable market action has been followed by an average decline of -0.84% in consumer confidence. Similarly, favorable market action has been followed by a contraction in the bearish percentage by -0.38% during the following month, while unfavorable market action has been followed by an average increase in the bearish percentage by +0.46%. Again, similar results hold even if we lag the data."

Monday, July 10, 2006

Hussman Weekly Commentary: There's No Such Thing as Idle Cash on the Sidelines

Hussman dispels the often used case for an impending bull market: there's so much cash on the sidelines. Once again, Hussman presents a compelling case...

Hussman Funds - Weekly Market Comment: July 10, 2006 - There's No Such Thing as Idle Cash on the Sidelines: "One of the hurdles in thinking properly about the financial markets is to understand the idea of "equilibrium" - that all securities issued must be held; that savings must equal investment; that every share bought by someone must be sold by someone else.

... and that there's no such thing as "idle cash on the sidelines."

Saturday, July 08, 2006

Prosper.Com Review

I have been playing around with Prosper.Com in the last few months and I want to give my initial impressions. First, is a peer-to-peer lending company... think eBay for unsecured lending. Borrowers submit their loan requests including: amount ($1k - 25k), maximum interest rate (up to 29% or state maximums) and various auction variables. Prosper takes their loan application, runs a credit report and assigns a 'credit grade'.

Lenders, such as me, deposit money into Prosper and then 'bid' on different people's loans by specifying how much they want to lend (from $50 up to the total loan amount) and the minimum interest rate they are willing to accept for that particular loan (every funded loan is comprised on one borrower and many lenders). As lenders bid on the loan, the interest rate stays at the borrowers maximum interest rate until enough money has been bid to fully fund the loan. Once fully funded, the auction starts... as new lenders bid, the interest rate starts dropping until the time limit of the auction expires.

Once the loan is funded and the auction is over, Prosper manages the receipt of monthly payments for borrowers (all loans are amortized over 36 months) and credits each lender's account with their fractional share of the payment.

Here's my editorial...


  • Great business model
  • There's a pretty tight and cooperative lender community
  • Website is well designed
  • My returns, so far, are exceeding my expectations. I am a lender participating in 107 loans with an average interest rate of 18.3%. I have received payments on all of the loans (87) where a payment has come due.
  • I should expect a 5% default rate based on the credit ratings of my loan portfolio. No defaults so far... but time will tell.


  • Prosper does not pay you interest on your unloaned money sitting in your Prosper account.
  • The cycle time to deposit money to my prosper account (both for my deposits and loan payments) is gut wrenchingly slow.
  • Once you win a loan bid, Prosper goes through a rather slow verification process that should take place before the loan gets listed.
  • Borrowers have complained about Prosper making various mistakes with payment posting.

Overall, I'm cautiously optimistic. Making 13-18% on my money while participating in a pretty interesting internet start-up is pretty exciting (yes, it doesn't take much to make me happy).

Please join my group on Prosper...

Join my group on Prosper, people-to-people lending

Here's a link to my loan portfolio. (Not completely accurate, but it's directionally correct.)

Monday, July 03, 2006

Hussman Commentary: July 3, 2006 - Fedwatching - Just Say No

Hussman Funds - Weekly Market Comment: July 3, 2006 - Fedwatching - Just Say No: "The financial markets continue to have what I view as an unhealthy and pointless obsession with the Federal Reserve. Unhealthy because it detracts attention from the significant risks posed to the stock market from rich valuations, and to the economy from an enormous current account deficit, weakening housing, and flattening employment conditions. Pointless because the monetary policy is now, and always has been, the gopher of fiscal policy. The Fed can do nothing but decide whether government liabilities held by the public take the form of money (currency and reserves) or Treasury securities. It has no power to determine the total quantity of those liabilities (Congress does that). Whatever influence the Fed ever did have was largely removed in the early 1990's (see Why the Fed is Irrelevant)."

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