Latest John Hussman market comments:
"Market Climate
As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and still moderately favorable market action. This combination holds us to a constructive investment position, with only about half of our holdings hedged against the impact of market fluctuations. While I am hopeful that the capture of Saddam Hussein will relieve some of the risks to our troops, with accompanying relief for the market, it's not clear that geopolitical risks have shifted overall, so the durability of any market advance on this news is unclear.
Most of the negatives we observe here are fundamental in nature, the most important being valuations, but extending to the massive U.S. current account deficit and the potential for credit market and inflation difficulties when short-term interest rates begin to normalize (as I've noted before, rising short-term interest rates tend to raise “monetary velocity,” triggering the inflationary impact of prior monetary ease). These fundamentals set the stage for future difficulties, but there is no telling at what point those difficulties will actually be expressed. Still, it is an overly optimistic “greater fool theory” to believe that any analytical tools, including our own measures of market action, are reliable enough to completely ignore these fundamentals without any defense at all, and simply “get out at the top.” Frankly, I don't think it's possible to identify tops or bottoms that way. It is precisely because we understand our capabilities that we are already half-hedged, despite the fact that our measures of market action remain generally favorable.
In the bond market, the Market Climate remained characterized by both unfavorable valuations and unfavorable market action. Except for moderate positions in Treasury Inflation Protected Securities, we are no longer holding positions in long-term Treasury bonds, and the duration of the Strategic Total Return Fund is down to less than two years. This means that a 1% (100 basis point) move in interest rates would be expected to impact the Fund by less than 2% on account of bond price fluctuations. The Fund currently holds nearly 15% of assets in select utility shares, and of course, we have continuing flexibility to change the portfolio duration of the Fund as interest rate conditions change, and are constantly evaluating the potential for investments such as TIPS, foreign government securities, and precious metals shares. In short, the “snapshot” of the Strategic Total Return Fund is largely defensive, with about half of the Fund's assets in short-term Treasuries, but as always, we respond to market opportunities as they arise.
I recognize the potential for shareholders to look at that “snapshot” position and ask why they should pay a management fee to hold half of their assets in T-bills. If that snapshot position was typical and ongoing, I would agree. But it is not. Our investment positions are continually adjusted to reflect the market opportunities we identify. Our objective is to achieve long-term total returns while also defending capital during unfavorable market conditions. To hold higher yielding but vulnerable assets in an attempt to look like we were “doing something” would be to abandon this objective for the sake of window dressing. You can count on us not to do that.
A few final remarks on corporate bonds, from the London Economist
“Spreads are at record lows, though they are unlikely to widen much for now because conditions are still positive. A rise in short-term rates could hurt many companies because they have not restructured as much as fans would have you believe. Moreover, debt has not fallen much as a percentage of cash flow; nor have interest payments in relation to profits (so-called interest coverage).
“It is hard to know how much companies have in fact lengthened the maturity of their debts because the interest-rate swap market allows them to swap those fixed bond payments into cheaper floating debt, a popular strategy in the investment-grade market. Moreover, the amount of money flooding into the market has been matched, understandably, by the number of companies wanting to tap it. The $112 billion of money raised in the junk-bond market so far this year is already more than double last year's figure, and is on course for a record.
“With demand so high, the quality of those coming to the market is falling. The number of weak companies (those rated B- or lower) issuing bonds was more than a third of the total in the third quarter, a level which usually spells trouble two to three years down the line, in the form of a pick-up in default rates. And although credit conditions have been so loose, S&P is still downgrading far more non-investment-grade companies than it is upgrading: 73% of its ratings actions are still downgrades.
“Which is worrying when yields have been chased so low, and investors are now so badly rewarded for taking risk.” |
