Adviser's Blog

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Just wanted to give you a quick update on our portfolio which has experienced some positive action lately – FINALLY!

After today, My Core Portfolio is almost back to even. The Focus portfolio still has some catching up to do but given how I have it invested, it won’t take long with many more days like today. I’ll report YTD figures at the end of the month.

The trends that I have been anticipating have started to emerge over the last couple of months. Several of these trends have accelerated over the last several weeks. Our portfolio is positioned to take advantage of these trends and has appreciated nicely. Of course, the market is still up for the year and I’m down so we have some catching up to do.

The key trends that have emerged are as follows:

1. The US$ has broken through its previous multi-year low at 80.39. For all intent and purposes, this represents the US$’s all-time low. It was lower at one point but that was before the introduction of the euro which was then substituted for several European currencies. As I said in my quarterly update, I am surprised by the timing of this development as I expected it would take place but only after the Fed hinted at lowering rates and inflation data subsided. Practically, every position in my portfolio benefits directly or indirectly from a falling US$.
2. The sectors that I feel will lead the market down continue to underperform. Small-caps, Financials (IYF), REITs (IYR) and Utilities (IDU) have significantly underperformed the market. These sectors will be the hardest hit during the next cyclical correction. The following is an update on how these sectors have underperformed the broad market.

Ticker	IYR	IDU	IYF	S&P
Peak	94.57	104.35	129.54	1539.18
Current	74.27	96.13	109.73	1511.01
% Loss	(21.5%)	(7.9%)	(15.3%)	(2.7%)

3. The PMs (Precious Metals) have seemingly reestablished their historical non-correlation to equities. As you know, one of my biggest fears has been a liquidity crunch that would lead to depreciation in all asset prices – equities as well as the PMs. The recent behavior of the PMs has served to alleviate some of my apprehension about being invested heavily in this space but I’m not entirely comfortable just yet. The PM stocks have still shown an annoying correlation to equities rather than the Metals but this should eventually correct itself.
4. Bond Yields continue to stay elevated as the market comes to grips with the reality of inflation in the marketplace. As I said in my Quarterly update, the disconnect between inflation pressures and inflation expectations has been the primary cause for losses in your account. It seems that Wall Street’s denial of the reality of inflation is gradually coming to an end.
5. From a technical standpoint, market breadth continues to deteriorate but is not quite signaling a bear market. Today, declining stocks outnumbered advancers by a more than a 6:1 margin. Leadership could be best described as bi-polar. The number of highs versus number of lows has been close to even over the last several weeks despite major indexes hitting new highs. Last month, I discovered a new indicator called the Hindenburg Omen. This has come up positive every day for the last 5. The homebuilders, which I warned about in April, have been destroyed the last several weeks. The I-shares Homebuilders Index ETF (XHB) fell 4.5% today to a fresh 52-week low.

I’m encouraged about the trends in the market place and I believe that over the next 12-24 months, our portfolio will appreciate substantially if these trends continue. With that being said, several of our positions are a bit overbought in the short-term and I wouldn’t be surprised or discouraged to see us give a little back over the next month or so. I’ll provide a more in-depth update at the end of the month. As always, please do not hesitate to contact me if you have any questions or concerns about your account.

All the best,
Matt

Hedge Fund/Investment Bank/Subprime/Leverage Meltdown

For quite some time, I’ve warned about the following risks in the market:
1. Hedge Fund Scandal
2. Housing Bubble and Subprime Fallout
3. Investment Banking Accounting
4. Leverage in the Market
Read the rest of this entry »

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

The following is a summary of my quarterly report to my clients. It is divided into three parts

When the market is fluctuating near its highs, it can be easy to forget that markets move in cycles rather than lines over time. It’s similarly easy to forget how effective corrections and bear markets are in eliminating most or all of late-stage bull market gains.
John Hussman, Ph. D. – 6/18/2007

Over the past four months, my investment strategy has had some set-backs resulting in YTD losses in your account. However, the trends that I have been speaking of are starting to take hold and profits for your account are likely to follow.

Here is how my performance measured up to the averages for the first half of 2007:

In this update, I’ll address the following issues to help explain why your account has suffered some short-term losses and why I believe this trend will soon come to an abrupt end.

In my written January update, I included a section on the importance of missing down years in the equity markets. I revisited this subject in my May Blog update which you can review by clicking on this link.

I don’t want to spend too much time regurgitating information from past updates, but I think it’s worthwhile to touch on a few highlights on why I think the next bear market will be worst than average: Read the rest of this entry »

Wow, what a day for the market. All the major indexes erased yesterday’s losses! It was a “red-letter day” for the Dow achieving it’s best one day advance of 2007.

But from a technical standpoint, the market continued to weaken. Over the past two days, more stocks have declined than advanced. About an equal number of stocks hit new lows today and yesterday then hit new highs even though the markets are only points off their 52-week highs. This suggests that while the “weighted averages” rebounded, more than half of all the stocks traded on our exchanges are still down after two days of relatively volatile action. Furthermore, increasing volatility typically signals a peak or trough in the market.

It’s still too early to tell if the bear market is starting, but today’s action reinforced the recent technical weaknesses in the market.

Bonds swooned today pushing the 10-Year Treasury note to its highest closing level since May 15, 2002. As expected, equities sold off in tandem with bonds (not even Greenspan’s jawboning could save the markets today). As I mentioned in my post June 7th, history suggests that equities could sell off even further given the recent sell-off in bonds.

One of my favorite analysts, Steve Saville , recently wrote an enlightening piece on the relationship between increasing bond yields and equity corrections. In his commentary he writes:

…a downward trend in the bond market will eventually take its toll on the stock market. It’s a question of when, not if, a downward trend in the bond market will drag equities lower. The “when” is typically 5-7 months, but is sometimes as long as 12 months from the start of the bond market’s decline….The current situation is that bonds are about 6 months into a downward trend, so we have entered the time-window when weakness in bonds should be starting to have an adverse effect on the stock market…If the bond market’s decline continues without significant interruption over the next few weeks then a knock-on effect will almost certainly be a sharp stock market correction. (emphasis mine)

He wrote this on June 10th, after the 10-Year Treasury note closed at 5.12% the previous Friday (6/8/10) – a full .23% lower than today’s close.

Mr. Saville goes on to speculate that rising bond yields could end in one of three ways:

1. Bond market rallies pushing rates lower and in line with equities.
2. The stock market corrects over the next couple of months thus keeping equities and bonds inline.
3. The bond market pushes equities into a cyclical bear market.

This is an update to a post I made on May 7th. I’ve copied most of the significant text so I took down the old post.

According to AAA, the average nationwide gasoline price hit another all-time high a couple of weeks ago at $3.22/gallon, besting its previous record of $3.06/gallon on August 11, 2006. Some are calling for energy prices to continue to move up calling for $4/gallon gas. Well, allow me to add some fuel to the speculation fire (pun intended).

Over the last eight months, we have seen an uncharacteristic draw in energy inventories which makes a solid case for higher energy prices this summer. Before I continue, let me provide a quick primer on the nature of energy inventories and shoulder seasons. Read the rest of this entry »

The equity and bond markets took a sizable hit today as bond yields soared. The Ten Year Treasury Note increase 13bps, its largest jump in 3 years (Since 5/7/2004). The equity markets followed suit by declining nearly 2%. Recent history suggests even further losses in the equity markets may be coming.

It was just twelve months ago that equity markets were in the midst of a 7% correction. The impetus for this correction was rising bond yields. Yields bottomed out in January of 2006 at 4.39% and gradually climbed until they reached 5.19% (0.80%) in mid-May. Coincidently, equities started their correction in early May and it lasted through early July.

Currently, Ten Year Treasuries have experienced an increase from 4.5% in March to close out today at 5.1% (0.60%). Including today’s nearly 2% drop, the S&P is just 3% off its YTD (and all-time) high.

It seems that the market is finally coming to the painful conclusion that the Fed is handcuffed and will not be able to lower rates this year due to increasing inflationary pressures. Rising energy and food prices are certainly not making the Fed’s job any easier. Energy and food prices are both up over 15% YTD according to the CRB Index.

I have maintained for some time that the next bear market will be defined by stagflation – a state of above average inflation and below average economic growth. The second cyclical correction of the last two secular bear markets (’37 & ’73) were both inflationary and it is looking like it will NOT be different this time .

In addition to the steep decline in bond prices (and corresponding increase in yields) the technical strength of the market is getting sloppy. Today, the number of declining stocks on the NYSE outnumbered the advancing stocks 11:1. Even with stocks less than 3% off their 52 week highs, more than twice as many issues on the NYSE hit 52 week lows as did 52 week highs (and at one point during the day, the S&P was less than 1.5% off its all time high). Market leadership has been neutral at best recently and today’s action should push the technical indicators that I track closer to being bearish.

With all that said, The S&P and DJI are only 3% off their all time highs. Market tops take time to develop. This could just be a simple correction. I’ll keep a keen eye on the technical strength of the market to determine if this indeed the beginning of the next bear market or just another head fake.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

The following is an update of a post that I wrote on April 17th, 2007 regarding the probability of a Goldilocks scenario versus Stagflation. I’ll update the data on the last day of each month and repost it. The purpose of this post and subsequent updates is to objectively examine the changes in both economic and inflationary data since the Federal Reserve made the decision to quit raising rates in the Summer of 2006. (Click here to view original post.)

In the month of April, Inflation figures moderated a bit. Specifically, the CRB Index and the PPI came down some but that was after a scorching hot February so they were due for some moderating. Energy prices are still climbing and the price of gas at the pump reached an all-time high a couple of weeks ago at $3.22/gallon (Nationwide average according to AAA.) The market is focused on Year over Year (YOY) figures on PCE, CPI and PPI but these are all skewed down because of the big dip in energy and metals prices last fall. PPI and CPI for the trailing 6 months (since November) are at 4.8% and 2% respectively which would be 9.6% and 4% annualized.

The big news is on the economic front. A mixed bag of improving manufacturing and construction data but a big dip in consumer spending. The other significant development was the much larger than expected dip in existing home sales below 6M annualized units. The average home price for existing sales did move up. This can be attributed to the fact that subprime borrows who would buy cheaper homes are being squeezed out of the market by stricter lending standards. While the consumer curtailed his spending, he still has a pretty optimistic outlook of the future as both Confidence and Sentiment improved.

By proceeding, I acknowledge that I have read and understood the Disclaimer, Performance Reporting Disclosure and Copyright Statements .

Dear Clients,

As I was putting notes together for this month’s update, I came across an interesting piece from Ed Easterling of Crestmont Research. It’s titled “Capture: Less Ups Needed if You Avoid Downs”. The purpose of his research was to answer the following question:

What percent of the gains during positive months is needed to match a buy and hold strategy if an investor avoids the declines?…The answer: if an investor can avoid the losses, it takes only 28% of the positive gains to match the market! (emphasis mine)

Easterling used the S&P 500 Benchmark index from 1956 – 2005 for his data. (I’ll send you a hard copy of Easterling’s work in my written update next month. In the interim, you can check it out by Clicking here.) Easterling’s study does exclude dividends from his data, but if you assume that the interest you earn in cash while out of the market is equal to the dividend yield, then the two would wash out. (In 2000, the yield on cash would have been much more than the dividend yield of the market but by 2002, dividends would have exceeded earnings in a cash account. Currently, the money market account I use for your account is paying approximately 3% more than the dividend yield on the S&P.) Read the rest of this entry »

Today, the Dow ended at an all-time high (priced in US$ that is) and the S&P 500 closed at a fresh 52-week high. On the surface, the market looks correction-proof – but under the surface, cracks are starting to show.

It was one month ago that the technical strength of the market began to deteriorate. Since April 16th, their have been some disturbing trends taking place in the market.

Two technical indicators that have historically been fairly accurate gauges of a bull market’s strength are Market Breadth and Leadership. While I track several sophisticated models to measure market breadth, I’m going to stick to a very simplistic view of it for the purpose of this post. I’d like to compare the performance of the Russell 2000 (RUT) which consists of 2000 small–cap stocks versus the Dow Jones Industrial Average (DJI) which consists of the 30 largest US stocks.

Since the close of business on April 16^th, the market has been open for 22 days. The DJI moved up on 18 of those days (82%), where as the RUT only went up 10 days (42%). During that span, the DJI is up slightly over 6%, where as the RUT is down almost 1.4%. That is a 7.4% disparity. A disparity of this magnitude has not taken place since the NASDAQ 100 underperformed the Dow and S&P 500 in similar fashion back in the early spring of 2000.

While breadth is starting to weaken, market leadership has been basically non-existent. Take today for example (5/16). Even though the DJI and S&P 500 are at 52 week highs, only 170 of the 3200+ stocks traded on the NYSE hit 52 week highs. This amounts to only 5% of the total shares traded. Leadership in the NASDAQ is even worse. NASDAQ shares saw an equal number of stocks hit new lows as hit new highs (116 new highs versus 117 new lows). While Large-cap names continue to push the market higher, the majority of stocks are not participating in the late stages of this bull market rally.

Either the underlying technical strength of the market will have to improve for the market to go much higher or we’re at the cusp of a new bear market. It will be interesting to see how it plays out.