Zen Lessons in Market Analysis
by ilene - October 12th, 2009 5:52 pm
Definitely one to pin on the fridge with a magnet: "Inquiry means not using the mental creation, but allowing yourself to get in touch, and to try to see how things truly are. We practice not to be influenced by the name, because when we are caught in the name we can’t see reality.” – Ilene
Zen Lessons in Market Analysis
Courtesy of John P. Hussman, Ph.D.
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“The best way of preparing for the future is to take good care of the present, because we know that if the present is made up of the past, then the future will be made up of the present. All we need to be responsible for is the present moment. Only the present is within our reach. To care for the present is to care for the future.”
Thich Nhat Hanh
This week’s comment is dedicated to my dear friend Thich Nhat Hanh, a Vietnamese Buddhist monk who was born on October 11, 1926, having been born previously in January of that same year, and twice again about 25 years earlier, not to mention countless other times through his ancestors, teachers, and other non-Thich Nhat Hanh elements. Thay (the Vietnamese word for “teacher”) would simplify this by saying that today is his eighty-third “continuation day,” because to say it is his birthday is not very accurate.
If the quote at the top of this page looks somewhat familiar to our long-term shareholders, it may be because the practice of tending to the present moment – responding to prevailing conditions rather than relying on forecasts – is central to our investment discipline.
Focusing on the present moment doesn’t imply ignoring the past or failing to consider the future. It’s clear, for example, that we put a great deal of attention on estimating future cash flows and discounting them appropriately in order to evaluate whether various investments are priced to deliver satisfactory long-term returns. We certainly devote our attention to macroeconomic pressures and latent risks that threaten to become full-blown crises later. Still, we rarely make near term forecasts. Nor do we answer surveys like “where do you think the S&P 500 will be at year-end?” – a question that falls entirely outside of our way of thinking – like asking Columbus what…
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Post-Crash Dynamics
by ilene - August 10th, 2009 7:14 pm
Post-Crash Dynamics
Courtesy of John P. Hussman, Ph.D.
The U.S. economy lost a quarter of a million jobs in July. Meanwhile, over 400,000 workers abandoned the labor force (and are therefore no longer counted among the unemployed), which prompted a slight decline in the unemployment rate despite the job losses. In the context of an economy still strained by high levels of consumer debt and still record delinquency and foreclosure rates, labor market conditions are still troublesome. Still, the pace of job losses and new unemployment claims has clearly softened from the pace we observed early in the year.
If we knew that this was a standard economic downturn, we might conclude that the recent improvements are durable. However, nothing convinces us that this is a standard economic downturn. As for market action, the major indices have generally been strong, as has breadth (as measured by advances versus declines), but the “investor sponsorship” evident from trading volume has been uncharacteristically dismal compared with initial advances of past bull markets. So here too, we have very strong concerns that the recent advance may not be as durable as investors appear to believe.
All of that said, we aren’t inclined to fight even what we view as errant analysis, and the Strategic Growth Fund has about 1% of assets allocated to near-the-money index call options – about enough to gradually close down about 40% of our hedge in the event that the market advances markedly higher from here, but without putting us at risk of much loss in the event of failure. With investors now anticipating and pricing in a sustained economic recovery, as well as a spectacular earnings rebound (see Bill Hester’s piece – Earnings Growth Forecasts May Require a Robust Economic Recovery – additional link below), a lot of things will have to go right from here in order to sustain higher prices than we currently observe.
Frankly, our call option allocation here is something of a paean to a notion – a sustained economic recovery and new bull market – that I have no belief in whatsoever. But at this point, the broad strength in the major indices, even lacking volume sponsorship or favorable valuation, requires that we allow for the possibility of additional investor speculation. Even if we do observe such an outcome, it’s difficult to envision that the S&P 500…
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The Outlook is Not Up, But Very Widely Sideways
by ilene - June 16th, 2009 10:52 am
Courtesy of John P. Hussman, Ph.D.
Introduction, by my friend Tom Burger
A good Hussman commentary. Hussman’s valuation metrics are very solid, in my opinion — sort of a variation on Benjamin Graham’s technique of using a multi-year earnings average. But forget the mathematics: his valuation metric told us that stocks were wildly overvalued immediately preceding the recent market crash, and modestly undervalued at the low. That ought to be worth something. I remember the so-called "Fed Model" said that stocks were significantly undervalued at the market peak, and wildly undervalued at the last market bottom. Doesn’t take a whole lot of thought to evaluate those two options based on recent experience. Hussman has also published some good reports that show how his valuation metric would have performed during the Great Depression — quite well.
Hussman provides an excellent discussion on what the recent Treasury and Fed moves mean in terms of balance sheet changes for banks, Treasury, and Fed. In general, he tries to clear up some oft-repeated fallacies about cash flows, liquidity, and what not. The air-waves are apparently full of utter nonsense. (I don’t listen to the chatter). I think Hussman is an unusually clear thinker and an extremely knowledgeable guy.
Tom, at Applying the Lessons of Free Market Economics
The Outlook is Not Up, But Very Widely Sideways
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
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Valuation Update: We estimate that the S&P 500 is currently priced to deliver total returns over the next decade in the range of 6.5-9.0%, centered at an expected total return of about 7.8% annually. Stocks are modestly overvalued here, except on metrics that assume a permanent recovery to 2007′s record profit margins (which were about 50% above the historical norm).
On normalized profit margins, sustainable S&P 500 earnings are slightly above $60 on the index. That’s certainly higher than the 7 bucks of net earnings that companies in the index have reported over the past 52 weeks, but unfortunately, even at current prices, the S&P 500 is near 16 times normalized earnings.
You can get that basic figure a lot of ways. Currently, book value on the S&P 500 is slightly above $500. Outside of the past 15 years, when the economy was building up to…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site