Are

Bells Ringing

For John Hussman??

You Can Ring My Bell

John P. Hussman, Ph.D.
President, Hussman Investment Trust

June 2024

I may as well just say it. 

Based on the present combination of extreme valuations, unfavorable and deteriorating market internals, and a rare preponderance of warning syndromes in weekly and now daily data, my impression is that the speculative market advance since 2009 ended last week. 

Barring a wholesale shift in the quality of market internals, which are quickly going the wrong way, any further highs from these levels are likely to be minimal. 

In contrast, current valuation extremes imply potential downside risk for the S&P 500 on the order of 50-70% over the completion of this cycle.

DYI:  John Hussman could very well be correct as I’ve been a semi-perma bear for at least since a brief excursion during March of 2020 with the position closed out only a few months later as stocks rocketed back to overvaluation levels. 

Of course that was then but this is now with stock evaluations that have left planet earth some where a top will be put into place.  When will the selling start in earnest?  If this is the top we’ll see selling in a few short months so don’t hold your breath staring at a computer screen waiting impatiently for the second stocks begin to tumble.

When the selling does begin a catalyst of some sort will take the blame but for those in the know this sky high valuation house of cards will come tumbling down based solely on their own weight.

Till Next Time!     

Sentiment Location

 

Sentiment Location

Smart Money - Buys Aggressively!

Capitulation

Despondency

Max-Pessimism 

Depression 

Hope - Silver F

Relief *Market returns to Mean  - Short Term Bonds & MMF

Smart Money - Buys the Dips!

Optimism - Gold

Media Attention

Enthusiasm

Smart Money - Sells the Rallies!

Thrill

Greed

Delusional

Max-Optimism  Residential Real Estate

Denial of Problem - Stocks 

Anxiety 

Fear

Desperation - Long Term Bonds

Current Economic Conditions

Prosperity - Moderate

Recession - Shallow

Deflation - None

Inflation - Moderate

Economic Choices

None

Shallow

Moderate

Prominent

Extreme 

DYI:  Long term investors those who are investing for a lifetime and especially for multigenerational organizations knowing the location for the booms and busts is the difference between excellent returns or those that are subpar (or possibly losses).

Let’s start for those asset I track that are on top of the mountain – max optimism – and work our way down the scale to max pessimism. 

Currently residential real estate despite mortgage interest rates moving up from around 3% to 7% home prices have refused to fall – or only sag minutely – where on the coastal regions homes have actually increased in price!  Until I see across the board inflation corrected declines in price this asset – residential real estate will remain at max-optimism.

Stocks are placed at Denial of a Problem.  No longer at max-optimism but one notch down as all listed stocks on the NYSE advance-decline line has remained flat since January 2022 only recently as of March 2024 there has been slight rise.  Bottom line stocks are not moving up in bull market fashion.  Less and less stocks are making their all-time high list that is a major sign of an ageing bull market.

Long term bonds as opposed to residential real estate have reacted violently to the downside as rates exampled by the 10 year T-Bond that bottomed at 0.52% (August 4, 2020) then whipsawed at a breath taking speed racing to 4.80% on September of 2023.  Only recently has rates slightly backed off with the 10 year T-Bond now at 4.22%!  The 10 year T-Bond yield has increased by 711% (current yield)!  Wow!

Silver bullion is at hope.  I haven’t changed silver’s sentiment location a bit more time needs to pass to see if its new higher price remains.  Silver is one of the standouts due to the Gold to Silver Ratio is massively in favor for silver – 79 to 1.  Precious metals are a stand out for value plus you will have the possibility of an extra kicker when the huge gap between gold and silver ratio closes back to its average since 1900 at 50 to 1.

Short term bills and notes of 5 years or less were in the dog house as the Fed’s pursued sub atomic low interest rate policy for years.  Now that that has changed these short rates are now at their respective mean.  For the first time in years savers/investors are able to make something from their hard earned savings.  Unfortunately inflation hasn’t cooled off enough to make a positive return (negative interest rates).  Nevertheless those holding cash equivalents at least now have a fighting chance.

Gold is at Optimism.  The Dow to Gold Ratio is currently at 17 to 1 (rounded) measured against its long term average of 10 to 1 since 1900.  There is a lot of up side potential left in gold as we all know markets whether bull or bear will go way beyond their respective average.

What would a lifetime investor or multigenerational institution portfolio look like?  My model portfolio that only changes as valuations change looks like this:

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/24

Active Allocation Bands (excluding cash) 0% to 50%

30% - Cash -Short Term Bond Index - VBIRX

45% -Gold- Global Capital Cycles Fund - VGPMX **

 25% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are domestic or international companies they believe will perform well during times of world wide stress or economic declines.  

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.

This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

Whether or not rates are cut in July of 2024 the economy has been declining at an increased pace!

 

10 Reasons Why a Rate Cut in July

From Mish Talk’s Mish Talk’s Website

1. In general, data is weakening across the board. Real disposable income has been negative in two of the last there months.

2.  The BEA made a large negative revision to GDP and GDI.

3.  Consumer spending took a dive in April and I expect it will stick this time.

4. Terrible reports from Target and Walmart on discretionary consumer spending.

5.  There have been numerous negative revisions in most of the recent hard data.

6.  Job openings are plunging.

7.  The GDP Now forecast is plunging fast.

8.  I finally expect rent to break the string of 32 consecutive months of rising at least 0.4 percent.

9.  The July meeting is nearly two months away, on July 31. There is plenty of time for further economic weakening and that is what I expect.

10.  There is no meeting in August. If the Fed is at all concerned about slowing, but not wanting to risk being too late (not that it will matter, but that is how the Fed thinks), the Fed will find a reason for a July cut.   

 The Tyranny

Of Costs

Mutual Fund Management Fees 

John Bogle’s Bombshell Gift to Americans

By Pam Martens: January 17, 2019

We’ll always remember Bogle for the courage he demonstrated on April 23, 2013 when he appeared on the PBS program Frontline. Bogle dropped the bombshell that Wall Street has attempted to hide for half a century: If you work for 50 years and receive the typical long-term return of 7 percent on your 401(k) plan and your fees are 2 percent, almost two-thirds of your account will go to Wall Street.

Bogle explained the math to Frontline’s Martin Smith:

Bogle: What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us.

Smith: What I have a hard time understanding is that 2 percent fee that I might pay to an actively managed mutual fund is going to really have a great impact on my future retirement savings.

Bogle: Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?

You can check the math yourself. Access a compounding calculator on line. Input an account with a $100,000 balance and compound it at 7 percent for 50 years. That gives you a balance of $3,278,041.36. Now change the calculation to a 5 percent return (reduced by the 2 percent annual fee) for the same $100,000 over the same 50 years. That delivers a return of $1,211,938.32. That’s a difference of $2,066,103.04 – the same 63 percent reduction in value that Smith’s example showed.

If you don’t know the amount of fees that you’re paying on the mutual funds in your 401(k) plan, 403(b) plan, IRA or other retirement vehicle, you may be putting your ability to retire with adequate income and dignity at risk.

DYI:  This is why I recommend Vanguard Funds as shown in my model portfolio as they are the leaders in the low cost field so investors will receive the lion share of the returns over time.  Plus positioning you in the most prominent asset based on its historical valuation.      

 

Symptoms of Bull Market Top

Financial indicators:

1.)  High trading volume – panic buying.

2.)  Substantial buying of equity mutual funds by the public.

3.)  Shiller PE¹⁰ at historical highs with a low market dividend yield.

4.)  Mergers & Acquisitions and IPO’s calendar very robust.

5.)  Widening credit spreads.

6.)  Numbers of stocks making new highs are in decline.

Mass Psychology:

1.)  Investors use any reason to buy.

2.)  Making money in the markets appears to be easy.

3.)  Investors can’t wait to read their portfolio statements

4.)  Public infatuation with highly leveraged speculations.

5.)  The media describes the economy and markets as goldilocks (or any other word describing perfection).

6.)  Known contrarian investors are bearish – are seen as out of step with the new realities – or simply appear to be stupid or crazy.

7.)  Annuities and savings accounts are seen as dead investments.

Monthly Update...Almost unchanged from last month. Stocks Insane High Valuation...Lt. Bonds Yields at their Mean...Gold is Good Value.

 

Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/24

Active Allocation Bands (excluding cash) 0% to 50%

30% - Cash -Short Term Bond Index - VBIRX

45% -Gold- Global Capital Cycles Fund - VGPMX **

 25% -Lt. Bonds- Long Term Bond Index - VBLTX

 0% -Stocks- Total Stock Market Index - VTSAX

[See Disclaimer]

** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are domestic or international companies they believe will perform well during times of world wide stress or economic declines.  

Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

Lump Sum any amount greater than yearly salary.

PE10  .........34.54
Bond Rate...5.42%

EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 Plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Purchase Bonds

Current EYC Ratio: 0.59(rounded)

As of  6-1-24
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.

Lump Sum is any dollar amount greater than one year salary.

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss...If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham

%
Stocks & Bonds

Allocation Formula

6-1-24
Updated Monthly

% Allocation = 100 x (Current PE10 – Avg. PE10 / 4)  /  (Avg.PE10 x 2 – Avg. PE10 / 2)]

Formula's answer determines bond allocation.

Current PE10.....34.54

Avg. PE10...........17.12

% Stock Allocation     0% (rounded)
% Bond Allocation  100% (rounded) 

Logic behind this approach:

--As the stock market becomes more expensive, a conservative investor's stock allocation should go down. The rationale recognizes the reduced expected future returns for stocks, and the increasing risk. 

--The formula acknowledges the increased likelihood of the market falling from current levels based on historical valuation levels and regression to the mean, rather than from volatility. Many agree this is the key to value investing.  

Please note there is controversy regarding the divisor (Avg. PE10).  The average since 1881 as reported by Multpl.com is 16.70.  However, Larry Swedroe and others believe that using a revised Shiller P/E mean of 19.6 , the number since 1960 ( a 53-year period), reflects more modern accounting procedures.

DYI adheres to the long view where over time the legacy (prior 1959) values will be absorbed into the average.  Also it can be said with just as much vigor the last 25 years corporate America has been noted for accounting irregularities.  So....If you use the higher or lower number, or average them, you'll be within the guide posts of value.

Please note:  I changed the formula when the Shiller PE10 is trading at it's mean - stocks and bonds will be at 50% - 50% representing Ben Graham's Defensive investor starting point; only deviating from that norm as valuations rise or fall.        

  

DYI

This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.

This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!

The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.

The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.

Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

The Formula.

A value based allocation strategy

February 19, 2010 by John Kingham