Now let me just say that I'm not sure if he really is frustrated or if he is merely being empathetic to shareholders but either way it is reasonable to be a little frustrated being up 5% in an up 50% world but that does not make the fund a bad fund and does not mean holders should sell. Hussman's post was a catalyst for an article for theStreet.com that should run later in the week that was more about the nuts and bolts of this type of fund but for this post I'd like to focus on the emotional response of frustration.
During the worst of the bear market there were comments from readers expressing interest in putting huge allocations to funds like Hussman's or one that I own and have written about the Rydex Managed Futures Fund (RYMFX) and my replies were along the lines of I love these funds in small does but they will get left way behind if the market goes up a lot.
That is just how the funds work and anyone buying in who is shocked that a low octane absolute return fund lagged a huge rally probably did not understand the product.If you bought an absolute return fund with proper expectations and the fund you chose has turned out to be much less volatile than the broad market then it would seem to me that it is doing exactly what you would have hoped for when you bought it. One or two funds like this combined with a couple of emerging market stocks or funds that are up close to the 80% that the iShares Emerging Markets ETF is up would help create a pretty good risk adjusted return for your portfolio.
Here is a crazy example that assumes that the Hussman fund charted will continue to have very low volatility. Since the March low the S&P 500 is up 50%. The Hussman fund is up 5% and the iShares Brazil ETF (EWZ) is up a little over 80%. Half the portfolio put into each would have resulted in the portfolio going up 42.5% in an up 50% world with only half the portfolio exposed to historically volatile assets.
The purpose for that example is to (hopefully) show that the result from the fund is too simplistic to say the fund did well or did poorly or that it should or should not be kept. The fund is behaving as I would expect it to and integrated properly into a portfolio it can deliver a useful result. If in the example above Brazil had dropped 30% then the portfolio would have been down 12.5%.
In the type of portfolio construction I write about, and implement, every holding serves a purpose along these lines. The other day I talked about swapping a lower vol name for a higher vol name as a way to increase exposure. When I added the Rydex fund a long ways back it was to reduce volatility. I imagine that had it been the Hussman fund instead it would have had a similar effect and I would have been just as happy with that fund as I am with the Rydex fund.
27 comments:
Gary has expressed the same frustrations with the PRPFX. But, I never viewed these funds as direct market participants in either direction.
AS you said " Rydex fund a long ways back it was to reduce volatility. I imagine that had it been the Hussman fund instead it would have had a similar effect and I would have been just as happy with that fund as I am with the Rydex fund." The same things happened with me while selecting Mutual funds due to sudden market fluctuation the right one got struck. hence got to bear the risk.
Hussman is certainly a great fund. Almost 9% compounded over the last 10 years. I happen to agree with his sediment on the market and own the fund. This is really a hedge fund with mutual fund fees.
Hussman has been wrong about this bull market. Yes even the best are wrong at times.
I do agree he is running a hedge fund with mutual fund fees, but he is running a very conservative and well run hedge fund. No body is right all the time.
This week's update from John Hussman struck me as unusual. He seemed to be expressing a fair bit of frustration over how much the market has gone up in the last few months and that their various disciplines and concepts have prevented them from having more net long exposure.
Interesting that you mention this because I picked up on the exact same thing. There was almost a hint of frustrated sarcasm with expressions like “profiting from the tooth fairy”, “flashing buy signals”, and “simplistic thinkers”.
Now I’m a HUGE Hussman fan, and HSGFX is a substantial position for me and client accounts (around 10%) and I’ve got no intention of selling, but I have to think very carefully about adding any new money or existing cash to the fund. My fear is that he is NOW boxed/locked himself into the fully hedged position (no matter how high or how long this run lasts) so therefore he will certainly miss whatever continued rise occurs.
IMO, he is money when it comes to macroeconomic, fundamental, and valuation analysis. That said, and I’ve mentioned this before in other forums, I think whatever he uses to determine “market action” (which is really just technical analysis renamed to avoid the pejorative context) is flawed. He was saying market action was unfavorable during much of 2006 and early 2007 when just about every credible technical analyst I follow was bullish.
Whatever “this is”, it certainly isn’t a “run of the mill” bear market rally. IMO, way too many resistance levels and downtrend lines have been taken out with multiple bullish technical signals (golden cross, Dow Theory bull, Coppock buy signal).
Maybe this is the mother of all bear market rallies (implying the Mar low or near the low will be revisited/retested sometime soon), but it seems more likely it is in fact a cyclical bull (implying substantially more upside with no major drops except for small corrections). I think this piece summarizes that view well:
http://seekingalpha.com/article/153317-new-bullish-signals-emerge
And the fact of the matter is there were some powerful historically valid signals screaming BUY near the Mar low:
Bullish sentiment was at a 20-year low comparable to the 1990 bear market low:
http://www.tradersnarrative.com/sentiment-overview-week-of-march-6th-2009-2332.html
”But the most fascinating and historic reading comes to us from the AAII weekly survey. The latest American Association of Individual Investors (AAII) data shows what can only be describe as total and utter capitulation. As of Wednesday (March 4th, 2009) 70% expected the market to continue to fall, while only 19% continue to see better times ahead.
The only data point from the AAII survey that approaches this level of gloom is back in October 19th, 1990 when a paltry 13% of respondents were bullish and 67% were bearish.”
The market was at one of the most oversold levels in 50 years:
http://www.tradersnarrative.com/reviewing-my-bullish-calls-in-march-2009-2795.html
And the market had hit a 12-year low which had only occurred a few times in the past 100 years.
Now I’ll admit I missed adding long exposure at 666-700 (I was already about 70 to 80% long having added long exposure both near the Oct 08 and Nov 08 low) as my next scheduled scale-in level was 600 and below.
In any case, just as he lagged the 2003-2007 cyclical bull, he will certainly lag whatever this is, probably even more since from that weekly comment he appears to have closed the door on anything but being fully hedged (Roger did you read it that way?).
RW, you out there?
Any thoughts on “what this is”? I’m perplexed and I’m not alone. I’ll note that Richard Russell who has decades of experience thinks this is the most confusing/misleading market and economy he has ever seen.
Everything I think I know about the economy (credit contraction, deleveraging, structurally higher unemployment, secular downtrend in consumer spending) tells me this is nuts and that corporate profits cannot possibly rebound, sustain, and grow to justify today’s stock market level. But the message of the market is what it is. Yet it has occurred on anemic volume. Is this the mother of all fake-outs?
I’m particularly concerned that “everyone is a technician” now and simply trading/investing the chart creating distortions that are utterly divorced from the real economy’s prospects.
Sorry, hard for me to keep my comments brief.
Mike C
Excellent posts. Yesterday I tried to explain the bull market rationale and RW ridiculed me for expressing the concept of a jobless recovery, something we will see a lot of in the decade to come IMO. I would not put a lot of faith in RW's concurrence if I were you.
anon 9:09 by posting anonymously you build no thread of context for anyone to know who you are. if you are the guy who said you were not down in 2008 and up 27% this year, that is great but no one know who you are, whether you were contributing to the comments though last year with any correct insight or what?
RW is anonymous w/o being anonymous which is easy to do and he has brought a lot to the table for a long time. You may have been commenting here for years or just started yesterday, no way for us to know and no way for you to convince the group.
Some suggest names for you to start building a thread (all well intended); Tupac, Thundermuck, Martin Briley (very obscure musician from MTV's early years) have fun with picking something but it is the only way to have a credible exhcnage with anyone.
Roger,
I like posting anonymously. I have been posting for several years.
People could concentrate on the comments made more instead of attacking the individual when they do not agree. People can respectfully disagree.
I did sign my post when I sold everything in July 07.
when I did a two week trade after Bernankes 75 basis point gift erly in 08 I also singned my post.
When I bought back in to early in the fall of 08 I also signed my post.
I have not sold my position since and will probably will not sign most posts. When I finally think this bull market is over and sell everything I will sign my post again. Until then I will just be anonymous most of the time.
SEG
roger, have you seen evidence that the slope of the 200 dma is significant? One of the links to a seeking alpha article in the comments states its importance. I think I've read something before stating that the slope doesn't really matter when you look at past performance.
Still, ya gotta hand it to Hussman for maintaining his discipline and not acting on his frustration. We should all be so disciplined.
Hmmm, I was intending sarcasm regarding a concept rather than ridicule of a person -- (the latter seems utterly pointless in a text-based, anonymous medium IAC and I do try to avoid pointlessness when I can) -- but regardless, although many seem to have become fond of the phrase, the notion of a 'jobless recovery' is actually something of an oxymoron in the normal business cycle framework: Employment increases later in recoveries (making it a lagging indicator within that framework) with increasing purchasing power and personal consumption driving a cyclic bull market to its peak with increasing cost of labor and materials coupled with growing overcapacity eventually leading to a slowdown and decline (recession).
That does not describe the 'bull market' of '03 and, so far at least, the big rally we're currently experiencing: To be clear I participated and am participating in both as my posts here and elsewhere support. But here's the thing, anyone attempting to invest in either of these large up-moves as if they were 'normal' cyclical bulls is probably underperforming; see http://tinyurl.com/mpmsa2 for what normal business cycle investing looks like.
So if these were and are not normal cyclical bull markets what were/are they? One of the reasons bull/bear debates aren't worth wasting much time on is that terms are rather poorly defined and it's too easy to talk past each other so here's my (highly simplified) take: 2003 and 2009 do have some characteristics of very weak cyclical recoveries but the market moves are incommensurate, too large and w/ distorted sector rotations and timing (see link above). At the risk of gross oversimplification the main difference I see is the zero interest rate policy (ZIRP) of the US, quantitative easing by central banks globally and sovereign wealth funds all contributing to increasing speculation and a de facto dollar carry trade. Some here may recall the Hugh Hendry video touching on that subject and there is a lively discussion going on currently at http://tinyurl.com/nbylba for the curious.
Shorter me then: There is a significant hot money element supporting this move and foreign currency appreciation against the dollar is driving it faster. If the Fed can not hold interest rates down and the dollar strengthens the additional liquidity supporting commodity and stock prices will dry up, quickly. If the central banks can hold out and economies including ours recover more normally then this move will likely get stronger legs and no one will be more pleased than I. Until then, I'm participating as I've stated: Flanks protected, powder's dry, the exit in clear view. YMMD and JMO as always.
Roger- now may be the time to take profits and add to SDS not back at sp900
Some horses win, others do not. The investor takes risk with any investment or advisor.
If a fund manager or financial advisor explains in a rationale manner why their strategy did not work as hoped (or that the premise for the strategy was flawed), the investor has the option of whether to hold, or fold and move on.
The best-laid investment plans seem to fail just when you imagine you have discovered a "can't miss" approach. And we all know that yesterday's all stars (Ken Granville, anyone?) are in large measure today's has beens.
T
I have a lot of respect for Hussman and find his commentary insightful. He is of course right that the market is vulnerable, volumes are low, and threats are everywhere. But the thing is the market consists of largely of irrational, speculative, trend-following, greedy sellers and buyers. It might be advantageous to take advantage of this behavior instead of trying to wait it out or wasting pixels complaining about it ;>
There is more than one way to make money: charts, macro, value / fundamental, momentum, arb, etc. But they each (mostly) tend to make money in lumps and not at the same time. It seems like it might make good sense for an absolute return type fund to enter another strategy when it has legs instead of just hedging up. That said Hussman probably is doing the right thing by way of honoring his prospectus - but his investors will still be mad if the market doesn't crash, and soon!
I still think it is important to differentiate between bull and bear. As Russel and others have noted this is a confusing market, but I personally need the bull bear distinction in my mind in order to know if I should be over weighting or under weighting equities.
You can call a jobless recovery an oxymoron if you wish but it still looks like a bull market with jobs as a backward looking component and much higher than we are used to for years to come.
Greenspan blew a bubble from the 87 crash his whole tenure. Bernanke continued the bubble and that whole period was abnormal and skewed. Now we get reversion to the mean. unemployment will be very high for years to come folks, but we will have bull and bear markets even if some one (maybe me) complains about another lost decade in the future
The markets are irrational....period. If we have a huge sell-off tomorrow...it will be said "it was expected after this huge run-up". If the market keeps going up from here, it will be said "we are in a huge bull market".
Rogers strategy is sound....be prepared for anything..and weight according to your prognosis
This smells like a bull market...
or is that the smell of lambs being led to slaughter in the morning?
Anyone see The American Dream
George Carlin on youtube...
signed,
the cynic
I'd like to add to all the previously mentioned:
1) Gurus. I'm guessing that like me, you have full time market professionals you follow - bloggers, pay sites, etc. Many of of my gurus have been really wrong about the rally. So you wonder - nobody gets it right all the time but geez, should I listen to to them anymore.
2) Both the bulls and bears have a briefcase or laptop full of compelling charts, stat's and analysis that make sense. I don't think any are lying, but it's hard to separate the partial and half truths out. Seems like a lot of extrapolation of one or two data points/reports/numbers.
3) Comfort of being either bullish or bearish = sleep better at night. Neither or both or limbo is a hard place to anchor the ship mentally.
4) Is China really growing or is it gov't manufactured growth? We assign a lot weight to China being the answer - but on some of my hobby forums, people who have been to China recently post they see A LOT of empty buildings and crumbling recently built structures. I don't know what to believe about China.
5) Self doubt - I wonder if I am over thinking or underthinking things.
6) Personal evidence. Checking with your friends, family, neighbors, and what's going on in your subdivision, city or town.
For me, feedback and observation is that a wide variety of business is down significantly and has not bounced back up at all.
Maybe your circles and locations are the complete opposite...
7) Can't is really be all clear now? It wasn't THAT long ago that Bush/Paulson were on TV telling us that $700B is need immediately or the financial system will collapse and GDII will be upon us.
Can all that be fixed so fast and and the all clear given?
I say if that if your confused or anxious or unsure then you have plenty of company.
SEG - long time and always good posts - please let us know it's you!
Bluesman.
It is me and I will sign SEG when I move my portfolio allocation or have a significant comment, but I do not sign many posts.
I do not agree with the main stream a lot and do not have time to argue my opposing point of view and can not post proprietary data from reliable sources IMO.
BTW - didn't they give Stiglitz a Nobel prize for calling everything Bush did part of a jobless recovery? Or was it just his bashing of Bush?
For the record SEG does not like Bush, Clinton, Bush, Obama, and especially dislikes Greenspan. The really bad news is Bernanke maybe better than Summers and I would not expect a truly competent individual to be appointed to head the Fed.
None the less I see no reason why we can not profit from the bull market we have and bull markets to come even if we get another lost decade.
SEG
I too noticed the frustration. However, it doesn't mean he isn't right. He did a better job navigating the downturn than the bulls screaming on CNBC. Of course, his fund is suppose to do that. But, the fact that it did bodes well for his analysis.
I think the talk of a jobless recovery is nonsense. We didn't have a jobless recovery during Bush either. It was a flawed BLS system of determining job creation. The birth/death ratio overstates employment during downturns and understates during upturns. Just how it is and BLS acknowledges it. So we won't see a real recovery from this until jobs reappear. With 10-14% of the population looking for work, we won't see a robust consumer.
Roger is right that hedging your position is critical. I do see so many similarities between 1930 and today. The rallies and sentiment are closely correlated. I am also one of those folks who believes that the Fed and other central banks can't fix this problem with easy money. This is what caused the problem initially. We are certainly getting a lift from it now, but when it ends, it will be painful.
Kirk,
You are correct that the BLS data was horrible under Bush and jobs were created during that bull market. Try getting the press and conventional wisdom to accept that though.
But, look at Japan they had numerous bull markets and their joblessness was still high. We are turning Japanese my friend. We will be seeing bull markets without jobs being created. Can not say this is good for the US or the economy but neither was blowing a bubble for 20+ years so we will have to take what we get.
Roger,
Perhaps I missed it, but do you employ, or have any thought on emerging markets debt? I recently entered a small position under the rationale that it was a way of gaining EM exposure, while cutting back some on the volativity.
Thanks in advance.
OT
@Anon 3:53,
Yes, Japan has had some bull markets since their funk started, and we had bull markets during the 1930s. But, every one of them didn't last. They were driven by emotions and were short in duration.
Fifty percent of the quarters during the Depression had positive GDP growth, and 80% of the quarters did the same for Japan since 1990. So there will be see-saws of emotions leading to short cyclical bull markets, but we won't have a real secular bull without jobs.
Of course, this assumes that we haven't entered a secular bull market already.
Of course, this assumes that we haven't entered a secular bull market already.
IMO, highly unlikely
http://www.ritholtz.com/blog/2009/07/ned-davis-on-secular-vs-cyclical-bull-markets/
I think #2 TRUMPS everything else, and we've got many years for a full unwinding on that.
WOW!
A thanks to Roger and all the contributors to the site for the informative dialogue. It helps!
j
Bluesman: Gurus:
I try to focus more on others' thought process rather then if they are right or wrong. Blogs give a great record that we can "grade" an expert on. When this whole mess started was a person more interested in being right or wrong or how many people agree with them? Did they blow off subprime as being unimportant? Or did they discuss their thought process, talk about subprime as a "what if" scenario and maybe even admit they have no idea the impacts but to be ready and have plans? I don't think anyone really could have known the impact that subprime started. I want to learn and come up with processes, not just follow buy/sell signals.
OT: I picked up some emerging market debt too. It seemed like a way to diversify my bond position in a similar US/international way my equities are. Its doing better then US debt but less then equities so it seems to be doing its job well enough.
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