Tuesday, October 7, 2008 0 comments ++[ CLICK TO COMMENT ]++

John Hussman Turns Moderately Bullish

This is big news; at least for me. John Hussman has been bearish for many years but is starting to turn slightly bullish. He is not calling for an absolute bottom, but he does see valuations starting to look reasonable.

With the S&P 500 trading below 1100, the U.S. stock market is now in the upper range of what I consider to be reasonable valuations. Stocks are certainly not "cheap" or undervalued overall, but they are no longer priced to deliver unacceptably poor long-term returns. I have no strong belief that stocks have reached a bottom. Although there is an increasing likelihood of a sustained "bear market rally," I believe there is a good chance that valuations will eventually move lower still before a durable cyclical low is established. Still, investors should recognize that normalized valuations are now the best they've been since 1995. That may not be saying much, since the total return on the S&P 500 since 1995 has averaged only about 7% annually, but it is what we might call "the beginning of wisdom."


Current valuations place the most likely expectation for 10-year total returns in the 5-8% range for the S&P 500. That's not particularly high on a historical basis, but already exceeds the projection we had at the 2002 bear market lows, and is the "least bad" since 1995.

Although I don't refer to Hussman often, I'm influenced by him. His portfolio strategy has noting to do with mine (he holds a diversified portfolio; is long-short; and isn't a stockpicker) but I tend to pay attention to his macro views.

Hussman also does not take kindly to the currently popular views that we need to something--anything--or else we will enter another Great Depression:

Frankly, I thought the drama and fear-mongering about another Great Depression was ridiculous in the first place. The same financial news anchors and Wall Street analysts that constantly gurgled about the market's resilience and strong fundamentals at the top, and all the way down, suddenly shifted to warning about Depression, economic meltdown, and bread lines - bread lines! - when they saw a big bucket of money that would only become available if the public was scared out of its gourd. Now you'll hear the same chatter until the Fed cuts rates again (which it almost has to do simply to maintain credibility, because the effective Fed Funds rate - which is hovering below 1% - is already so much lower than the 2% target). Call me cynical. This Depression talk is just outrageous - especially from people who didn't have the slightest sense that any of this was coming.

I share a similar sentiment. We are nowhere near a Great Depression. The US economy is doing OK.

One thing to keep in mind is that the people who are calling for the end of the universe are almost always the same people who said things were good two years ago. If they were so wrong back then, it remains to be seen how right they are this time. If you didn't think the housing bubble was out of control, what makes you say that this would lead to a depression?

One thing, though, that separates Hussman from others is his sanguine view that bondholders of financial firms taking losses is not a big deal. In contrast, the Street thinks that such a scenario will dry up (future) capital for financials and hurt these companies in general. This is why most of the bailout attempts have been to save bondholders. It is also likely why we have been hearing more and more from Bill Gross, Mohamed El-Erian, and others--all bond investors--who will take losses that they probably never thought they would. Shareholders in the bailed out firms have almost always been wiped out or ended up with massive, unrecoverable, losses so these so-called bailouts have little impact on shareholders.


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