New Economy, or Unfinished Cycle? / Hussman

tough times for rational investors like Hussman. to me it more an more obvious that only a major "credit event" in the lbo/takeover mania can shake the markets. to be honest i thought that this event happened in February in subprime........

harte zeiten für rationelle investoren wie Hussman. es sieht immer mehr so aus das eizig und allein ein "unfall" im kreditsegment der lbo/übernahmen etwas ändern kann und die märkte nachhaltig urchschütteln kann. um ehrlich zu sein dachte ich das dieses ereignis bereits im februar im bereich subprime kredite stattgefunden hat......

Presently, the market's valuation on the basis of price/revenue, price/book, and price/dividend is higher than at any prior historical market peak on record except the 2000 peak.

On the basis of normalized profit margins, the current P/E for the S&P 500 would be about 25 times record earnings rather than the (still elevated) multiple of 18.4.

Even if we give only 25% weight to that normalized value, and give 75% weight to the prevailing multiple, the resulting P/E for the S&P 500 is still over 20, and is about the same as what prevailed prior to the 1929, 1973-74, and 1987 market plunges.

This market is only “cheap” if one couples non-GAAP “forward operating earnings” with the Fed Model. As I've detailed in recent weeks, that approach has ridiculous implications even in the data sample (1980-2000) that was used to construct it, and is quickly and easily verified as pure garbage in pre-1980 data, using any proxy remotely close to estimated “forward earnings

An Optimistic Route to a Poor Market Outlook / Hussman

cheap markets........click on the headline to read the full piece

wirklich billige bewertungen....klickt auf die überschrift um den vollen kommentar zu lesen

The latest Investors Intelligence figures are at 53.3% bulls and just 20% bears. At such points, the average return/risk profile of the market has been unfavorable, regardless of apparent market strength.....

Normalized earnings
....As I've frequently noted, market P/E ratios should be (and generally have been) dirt cheap when earnings are unusually elevated. You can run a long-term 6% growth trendline over the cyclical peaks in S&P 500 earnings about as far back as you care to go. Historically when earnings have been anywhere within 10-15% of that trendline, the average P/E on the S&P 500 has been just about 10. At a multiple of over 18 times top-of-channel earnings, present valuations clearly look rich.


So it was not surprising to read Steve's conclusion that, on a normalized basis, the valuations for the largest 3000 U.S. stocks are currently in the 97% percentile of historical experience, noting “A correction back to the historical valuation median implies a 35% decline.”

What did surprise me a bit was his conclusion that as of April 30th , the normalized P/E for the large-cap stocks in the S&P 500 (using a 5-year averaging method) was only in the 81st percentile, implying a 21% decline to the historical median, and that restricting the history to the period from 1957 to-date, the current value was only in the 72nd percentile, implying just an 8% decline to the (higher) median for this period.

If you think about it for a minute though, that result makes perfect sense. Unreliable estimates of overvaluation – but perfect sense. See, people who work with statistics a lot recognize that averages can be skewed by a few extreme values or “outliers.” So a careful analyst will often use medians (the middle point when you sort the data in order from lowest to highest values) to get a better idea of the “central tendency.”


So far, so good. The problem is that if you reduce the number of data points, or include a whole set of extreme and unrepresentative values, even the median will give you skewed results. If you do both – your median will become unreliable.

The case in point here is the late-1990's bubble period. Here we have about 18 quarters of really extreme data in terms of normalized valuations, seen nowhere before in history and already known to have produced very unsatisfactory returns. Even including the recent advance, the total return on the S&P 500 remains below Treasury bill returns for the past 8 years.

Even if we aren't calculating an average, the addition of these points in a median calculation still ends up skewing the median higher because those points are all distributed on one side, and raise the level at which the midpoint is found. Using data since 1926, excluding the bubble, the median normalized P/E is closer to 30% below present levels. ....

Suffice it to say that unless one expects to see late-90's level valuations with regularity in the future, they shouldn't be included in an estimate of central tendency for valuations. ....

A final remark has to do with using a 5-year average of earnings to normalize P/E ratios. When we look historically, we see a clear tendency for earnings growth to be higher from points when earnings were well below their long-term 6% trendline than when they were close to that level. Since trends in earnings have tended to ebb and flow over periods of more than 5 years, using a 5-year average when the general level of earnings is depressed relative to trend will still give you a relatively high P/E. Conversely, using a 5-year average when the general level of earnings is near the peak trendline will produce a lower P/E. If investors don't correct for this, they can still confuse elevated earnings for cheap valuations.

At present, we've got earnings pushing the extreme of that historical trend, and yet the normalized multiple isn't even low. That's doubly problematic

An optimistic route to a poor market outlook
You can imagine that a P/E based on 5-year average trailing earnings will be using “unrepresentative” earnings figures anytime the economy is in recession. Using those depressed earnings will still tend to depress the 5-year average and therefore lift the resulting P/E.

As an alternative, we can take the most optimistic route, which is to base the 5-year average on the highest level of earnings attained up to each year. So for example, the current 5-year average would include the peak earnings as of 2003, the peak as of 2004, as of 2005, as of 2006 and as of 2007. If earnings in any of those years were below their peak to date, you'd use the peak value instead. If you do that, you get the following historical valuation chart, using data since 1871. You can see why one might not want to include the late 90's bubble in one's calculation of “normal valuations.”

You can also see that today's values are at the same level as they were about 8 years ago. Did I mention that the S&P 500 has underperformed Treasury bill yields since then? Ah, yes. I believe I did

The "Money Flow" Myth and the "Liquidity" Trap / HUSSMAN

this only a very small sample of the good and long post with quotes like this.

dieses ist nur ne kleine zusammenfassung. in dem report von hussman verstecken sich zitate wie

" am increasingly losing confidence that Wall Street
operates on a well-defined base of knowledge. Instead, I am struck by the number of platitudes and false constructs that seem to dominate the investment management industry."

click on the headline to read the full piece / bitte auf die überschrift klicken


I've noted for some time that S&P 500 earnings are at the very top of their long-term 6% peak-to-peak growth trendline – a level of earnings that has typically been associated with an average price/earnings multiple of 10 (not the current 17). See last week's market comment for a review of these conditions. Meanwhile, the dividend yield on the S&P 500 is about 1.9%.


In order for the S&P 500 to achieve a “normal” annual return of about 11% over the coming 5 years, we have to assume a maintenance of record margins, sustained top-of-channel earnings growth (which has never before been sustained for such a period), and an expansion of valuations to a multiple of 20 times peak earnings (the same multiple as at the 1929 and 1987 peaks, which is double the average historical multiple on top-of-channel earnings). Investors should think now about whether these assumptions are plausible, because they may find themselves wondering later why they ever did.

My impression is that the probable expectation for total returns on the S&P 500 over the coming 5-years is below 5% annually, in a likely interval that includes zero. It takes implausibly optimistic assumptions to move substantially above that range.

As for 10-year returns, for which the historical evidence has typically allowed tighter confidence intervals, the following chart updates the study that appeared in the February 22, 2005 market comment (“The Likely Range of Market Returns in the Coming Decade”) using the same methodology. Note that actual market returns moved outside of the typical range only during the late 1990's bubble, and that the most recent 10-year return of about 7.6% since 1997 has been at the top of the expected range precisely because current valuations are at the top of historical norms.

Currently, the likely range for S&P 500 returns over the coming decade is between a -3% annual loss and a 5% annual return, centering in the low single digits. That range will seem preposterous to some investors, but remember that it took the late 1990's market bubble to move actual returns even 5% outside of this set of bands. Unless investors anticipate a repeated excursion into similar valuation extremes, it would be a good idea for them to recognize now, rather than later, that stocks are unlikely to produce satisfactory long-term returns from current valuations.

Rapunzel Gets a Trim / hussman

a very good post (as usual) from hussman. he was right. i suggest to read the full piece. some good comments on private equity etc. click on the headline

i empfehle den kompletten artikel zu lesen. plötzlich steht er hussman nicht mehr als zauderer da.... das hat sich mit der letzten woche wohl erledigt. bitte auf die überschrift klicken.

A few comments about prevailing bullish themes here. Probably the main bullish theme at present is the misguided focus on “forward operating earnings,” which create the impression that stocks are reasonably priced. This piece of bait contains a very long, sharp hook, which is likely to keep many investors on the line well into the next bear market.

Expectations for future operating earnings assume that current, record high profit margins will not only be sustained, but will expand further. Yet even when earnings ultimately fall short, analysts will be under no obligation to lower their “forward” expectations, at least initially. The resulting illusion of cheap valuations, fairly early in the next bear market, is likely to keep a great many investors holding on deep into the decline (whenever it begins in earnest). As in many other bear markets, earnings will probably decline convincingly only after a great deal of damage has already been done.

I cannot emphasize enough that price/earnings ratios, especially those based on “forward operating earnings,” are unusually poor metrics of valuation at present. ( this must be "breaking news" for 98 percent of wall street.....at least to all the guests that appear in the media...... muß für 98% von wall street ein schock und ne echte neuigkeit sein...zumindest bei denen die in den medien auftauchen....leider gilt das zunehmend auch für deutschland....)

As a refresher of where the earnings picture stands at present, note that S&P 500 earnings have now slightly exceeded their long-term 6% growth trendline, while profit margins are about 50% above the norm (i.e. an earnings trendline about 33% lower would run through the middle of the data).


From an historical perspective, this is about as good as it gets – once earnings have become similarly elevated, one has generally been able to find a point years later where earnings have achieved zero growth from that peak.