Puppet Show

John P. Hussman, Ph.D.
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Last week, the S&P 500 advanced the extra 1% required to re-establish virtually every “overvalued, overbought, overbullish, rising-yields” syndrome that we define – syndromes that have appeared at or close to the beginning of what investors can easily recall as the singularly worst set of market instances in history, including the 1973-74, 1987, 2000-2002, and 2007-2009 plunges. With some minor imputation (estimating bullish and bearish sentiment as a function of the extent and volatility of prior market movement), we can verify that these syndromes also emerged just prior to the 1929-1932 collapse.

The S&P 500 is presently near or through its Bollinger band (2 standard deviations above its 20-period moving average) at daily, weekly and monthly resolutions, the Shiller P/E (S&P 500 divided by the 10-year average of inflation-adjusted earnings) is above 22, Investors Intelligence reports lopsided sentiment at 53.2% bulls versus 22.3% bears, the S&P 500 is well into a mature bull market and Treasury bond yields have advanced measurably.

The blue lines over the chart of the S&P 500 below are even sparser than our typical charts of "overvalued, overbought, overbullish, rising-yield" events, and identify the points where the S&P 500 was within 3% of its upper Bollinger bands, at least 7% above its 52-week smoothing, and over 50% above its 4-year low, with bulls above 52% and bears below 27%, a Shiller P/E above 18, and 10-year Treasury yields above their level of 6-months earlier. As I often note, there are numerous ways of defining syndromes like this. The conditions here are essentially a way of identifying what have normally been the most strenuously overvalued, overbought, overbullish, rising-yield points within already mature market advances. Investors who are willing to accept present, record profit margins (about 70% above historical norms) as permanent will reject the notion that stocks are overvalued, but I trust that the evidence we’ve presented over time underscores the deeper basis for that conclusion. See last week’s comment Declaring Victory at Halftime for the relationship between profits as a share of GDP and subsequent earnings growth, Too Little to Lock In for the link between deficit spending and corporate profits, and Overlooking Overvaluation for the relationship between various valuation metrics and subsequent market returns.

For optimists, there is a false one-week signal in 1997 – during the internet bubble – that was not associated with a negative follow-through. That is, as long as one ignores that the S&P 500 was essentially unchanged 5-years later, underperformed Treasury bills for the next 12 years, and even through last week’s advance, has outperformed Treasury bills by less than 2% annually in the nearly 16 years since then (all of which would be surrendered by even a run-of-the-mill bear market decline – and then some). There is also a fairly uneventful signal in mid-1964 that was not followed by near-term losses, though the market was still lower two years later and would underperform Treasury bills for the next 20 years.

Notably, during the recent bull market advance, we’ve seen conditions as extreme as at present only once – in early 2011, just prior to a nearly 20% market loss, though not rivaling the 30-50% plunges that this syndrome has also captured.

My concerns here are understandably easy to dismiss given that the S&P 500 is now more than 5% higher than it was in March of last year, when our estimates of prospective return/risk (on a smoothed horizon from 2-weeks to 18 months) first plunged into most negative 1% of market history. Yet despite the intervening monetary heroics, history suggests not that these conditions will persist without resolution, but instead that their resolution is likely to be that much worse. Anyone who followed me in 2000 or 2007 will easily recall a similar frustration before the bottom fell out of the market on each occasion. I can’t assure that the same will occur in the present case, but I believe it would be reckless to assume that the Fed has these risks covered. With margin debt over 2% of GDP as it was on three prior occasions – 2000, 2007 and early 2011 – it’s clear that investors are all-in when it comes to faith in the Fed. Still, when an investment thesis becomes so universally embraced and so apparently easy to follow that anyone who resists is considered foolish (as was the case with tech stocks in 2000), my risk aversion needle hits the red zone.

If the defensiveness of a supposed permabear seems hard to swallow even with the S&P 500 pushing its upper bands in a mature bull market, here’s what I would suggest. Carefully identify what has ultimately (not temporarily) been unlikeable or incorrect about my investment views over the years. For most people who follow my work, the main answer will be my insistence on remaining defensive in 2009 (despite the success of our approach to that point) until I was certain that our methods were robust to “out of sample” Depression-era data. There are also several points in recent years when trend-following measures were favorable – but without the presence of hostile “overvalued, overbought, overbullish” syndromes – where some added emphasis on trend-following measures would have helped in the face of unprecedented monetary intervention (unfortunately, constructive trend-following measures have historically been of little help to prospective returns once overvalued, overbought, overbullish syndromes have kicked in).

The ensemble methods that resulted from that 2009-early 2010 "two data sets" challenge, and criteria to increase the frequency of constructive positions when our trend-following measures are favorable (absent hostile syndromes, but even when our return/risk estimates are negative), represent the two material changes we've made to our approach since 2000 (see Notes on an extraordinary market cycle). This past cycle was extraordinary because it featured not just risk (the negative portion of a reasonably known range of outcomes), but also extreme uncertainty (the lack of knowledge about the range of outcomes that are even possible). The 2009 “miss” did not result from applying our present methods, but as I noted at the time, resulted from the need to address a “two data sets” problem in a world where Depression-era outcomes had become possible. It's not entirely clear whether future cycles could invite Depression-like outcomes, rapid inflation, or unforeseen fiscal strains. What I do believe is that our approach to estimating prospective market return/risk (incorporating ensemble methods) is robust to "out of sample" data, and can engage those uncertainties - if they emerge - without further changes. It's clear that what I saw as a necessary stress-testing response in 2009 ended up injuring not only my record, but my reputation, and the patience of those who rely on my work. I do believe it made us far stronger, but time will tell, and I don't expect that we will require a great deal of it.

In any event, one can hardly embrace our 2000-2002 and 2007-2009 defensiveness (not to mention our intervening bullish shift in early 2003), and at the same time reject our present defensiveness, because what our approach indicates today is what it would have correctly indicated in similar conditions in numerous other cycles. None of this ensures that stocks will not advance to further extremes in the near-term. Regardless, I have very little doubt that investors will observe better – or spectacularly better – points at which to accept market risk, when the evidence does not ask them to rely on the hope that a strenuously overvalued, overbought, overbullish market will become more so.

Puppet Show

The U.S. fiscal deficit remains near 10% of GDP. The Federal Reserve continues a well-advertised campaign of quantitative easing, on its way to push the monetary base toward 27 cents per dollar of nominal GDP (the last time we even hit 17 cents was the early 1940s, which was not unwound by subsequent tightening, but instead by a near-doubling in the consumer price index by 1952). Conditions in Europe have stabilized due to massive easing by the European Central Bank, coupled with assurances that the ECB will do whatever it takes to backstop sovereign debt obligations (though these words are actually still untested, as is the meaning of "strict conditionality.")

What’s fascinating is that in the presence of what are not thin strings, but massive cables supporting the economy like a puppet, the only response that Wall Street can muster is “Hey! He’s walking!” – as if the puppet is capable of motion without being propped up to a nearly reckless extent. 

I’ll preface these economic comments by repeating that our concerns about market risk here are independent from our economic concerns, and are driven by conditions that have typically been negative for stocks regardless of the economic context. Still, to the extent that part of Wall Street’s enthusiasm here rests on the idea that Pinocchio has become a Real Boy, it’s useful to review the evidence.

At this point, the economic data are wrestling between two likely possibilities and a third less likely one. The first of the likely ones remains that the U.S. already entered a recession in the third quarter of 2012. On that possibility, as statistician Nate Silver has noted, in data since 1965 the average revision from the initial estimate of quarterly GDP growth to its eventual figure has been 1.7%, and the 95% confidence interval has been plus or minus 4.3%. While I expect the full third-quarter GDP figure of 3.1% to remain positive post-revision, it’s not at all clear that fourth-quarter GDP (estimated to come in about 1.5%) will survive those eventual revisions – ditto for the marginal bounce in industrial production.

The second likely possibility is that the enthusiasm about QEternity (combined with a positive jolt to personal income from special dividends to front-run the fiscal cliff) represented another successful round of “kick-the-can” to push a weak economy from the verge of recession for another few months. When we look at the broad evidence from a variety of good leading and coincident indicators, that’s actually the possibility that I am starting to lean toward.

The chart below offers a reasonable picture of present conditions. Note that in recent months, we’ve enjoyed a bounce in the overall, new order, and order backlog components of a variety of regional and national economic surveys from the Federal Reserve and Institute of Supply Management. Interestingly, the employment component has persistently deteriorated. Present levels are largely indistinguishable from what we observed when the economy was already in recession in early 2008, but in view of the series of stronger, more successful can-kicks the Fed has achieved in recent years, we have to allow for the possibility that the most recent one has bought a few months of recession avoidance.

The unlikely possibility, in my view, is that the economy has started to walk on its own (much less sing and dance with Jiminy Cricket). There is not nearly enough improvement in leading measures, coincident/lagging measures, or other metrics to infer a meaningfully positive shift in the broad economy. As I’ve noted before, joint upward leaps in the Philadelphia Fed index and the new orders component of the Chicago PMI report would be strong indications that we should back off from our recession concerns. As things stand, the Philadelphia Fed numbers were revised lower for prior months, and jolted to the downside in last week’s report.

I should note that we did see a large drop in initial claims for unemployment last week, but it’s important to understand the dynamics of initial claims. As a rule, the second week in January experiences a massive upward spike in actual, non-seasonally adjusted initial claims, as retail jobs are lost following the holiday season. To smooth that spike away, the seasonal adjustment for the second week of January is aggressively downward. But as a further result, in years where that upward spike in actual job losses doesn’t concentrate in week two, the seasonal adjustment turns out to be far too large, so the seasonally-adjusted figure seems remarkably low – as it did last week. In those cases, the normal post-holiday job losses still occur, just distributed more broadly through about mid-March. But because the seasonal adjustment process “thinks” it already took care of that spike, the seasonal adjustment isn’t aggressive enough as those jobs actually come off, and what follows is several weeks where the seasonally-adjusted initial claims numbers are tens of thousands higher than they otherwise would have been. We’ll know that this dynamic is operating if initial claims inexplicably begin to rise toward 400,000 between next week and mid-March. We’ll suspect that a recession dynamic is also in play if the figures rise materially beyond 400,000.

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Fund Notes section relate specifically to the Hussman Funds and the investment positions of the Funds.

In honor and remembrance of Dr. Martin Luther King, Jr.

A few soundbites of Dr. King’s “I Have a Dream” speech are all that many people know of him. To read (or ideally listen to) his other speeches is the best way that one can really appreciate his wisdom and depth, and to understand why his leadership is so terribly missed. My friend and teacher Thich Nhat Hanh, a Buddhist monk, was friends with Dr. King decades ago, so I feel a personal connection to his speech on Vietnam (see the bottom of the January 21, 2007 comment), but as Dr. King made a tradition of teaching on the following topic at least once a year, this seems the right way to honor him.

Loving Your Enemies
November 17 1957

“I want to use as a subject from which to preach this morning a very familiar subject, and it is familiar to you because I have preached from this subject twice before to my knowing in this pulpit. I try to make it a, something of a custom or tradition to preach from this passage of Scripture at least once a year, adding new insights that I develop along the way out of new experiences as I give these messages. Although the content is, the basic content is the same, new insights and new experiences naturally make for new illustrations.

“So I want to turn your attention to this subject: "Loving Your Enemies." It's so basic to me because it is a part of my basic philosophical and theological orientation—the whole idea of love, the whole philosophy of love. In the fifth chapter of the gospel as recorded by Saint Matthew, we read these very arresting words flowing from the lips of our Lord and Master: "Ye have heard that it has been said, ‘Thou shall love thy neighbor, and hate thine enemy.' But I say unto you, Love your enemies, bless them that curse you, do good to them that hate you, and pray for them that despitefully use you; that ye may be the children of your Father which is in heaven."

“Over the centuries, many persons have argued that this is an extremely difficult command. Many would go so far as to say that it just isn't possible to move out into the actual practice of this glorious command. But far from being an impractical idealist, Jesus has become the practical realist. The words of this text glitter in our eyes with a new urgency. Far from being the pious injunction of a utopian dreamer, this command is an absolute necessity for the survival of our civilization. Yes, it is love that will save our world and our civilization, love even for enemies.

“Now let me hasten to say that Jesus was very serious when he gave this command; he wasn't playing. He realized that it's hard to love your enemies. He realized that it's difficult to love those persons who seek to defeat you, those persons who say evil things about you. He realized that it was painfully hard, pressingly hard. But he wasn't playing. We have the Christian and moral responsibility to seek to discover the meaning of these words, and to discover how we can live out this command, and why we should live by this command.

“Now first let us deal with this question, which is the practical question: How do you go about loving your enemies? I think the first thing is this: In order to love your enemies, you must begin by analyzing self. And I'm sure that seems strange to you, that I start out telling you this morning that you love your enemies by beginning with a look at self. It seems to me that that is the first and foremost way to come to an adequate discovery to the how of this situation.

“Now, I'm aware of the fact that some people will not like you, not because of something you have done to them, but they just won't like you. But after looking at these things and admitting these things, we must face the fact that an individual might dislike us because of something that we've done deep down in the past, some personality attribute that we possess, something that we've done deep down in the past and we've forgotten about it; but it was that something that aroused the hate response within the individual. That is why I say, begin with yourself. There might be something within you that arouses the tragic hate response in the other individual.

“This is true in our international struggle. Democracy is the greatest form of government to my mind that man has ever conceived, but the weakness is that we have never touched it. We must face the fact that the rhythmic beat of the deep rumblings of discontent from Asia and Africa is at bottom a revolt against the imperialism and colonialism perpetuated by Western civilization all these many years.

“And this is what Jesus means when he said: "How is it that you can see the mote in your brother's eye and not see the beam in your own eye?" And this is one of the tragedies of human nature. So we begin to love our enemies and love those persons that hate us whether in collective life or individual life by looking at ourselves.

“A second thing that an individual must do in seeking to love his enemy is to discover the element of good in his enemy, and every time you begin to hate that person and think of hating that person, realize that there is some good there and look at those good points which will over-balance the bad points.

“Somehow the "isness" of our present nature is out of harmony with the eternal "oughtness" that forever confronts us. And this simply means this: That within the best of us, there is some evil, and within the worst of us, there is some good. When we come to see this, we take a different attitude toward individuals. The person who hates you most has some good in him; even the nation that hates you most has some good in it; even the race that hates you most has some good in it. And when you come to the point that you look in the face of every man and see deep down within him what religion calls "the image of God," you begin to love him in spite of. No matter what he does, you see God's image there. There is an element of goodness that he can never slough off. Discover the element of good in your enemy. And as you seek to hate him, find the center of goodness and place your attention there and you will take a new attitude.

“Another way that you love your enemy is this: When the opportunity presents itself for you to defeat your enemy, that is the time which you must not do it. There will come a time, in many instances, when the person who hates you most, the person who has misused you most, the person who has gossiped about you most, the person who has spread false rumors about you most, there will come a time when you will have an opportunity to defeat that person. It might be in terms of a recommendation for a job; it might be in terms of helping that person to make some move in life. That's the time you must do it. That is the meaning of love. In the final analysis, love is not this sentimental something that we talk about. It's not merely an emotional something. Love is creative, understanding goodwill for all men. It is the refusal to defeat any individual. When you rise to the level of love, of its great beauty and power, you seek only to defeat evil systems. Individuals who happen to be caught up in that system, you love, but you seek to defeat the system.

“The Greek language, as I've said so often before, is very powerful at this point. It comes to our aid beautifully in giving us the real meaning and depth of the whole philosophy of love. And I think it is quite apropos at this point, for you see the Greek language has three words for love, interestingly enough. It talks about love as eros. That's one word for love. Eros is a sort of, aesthetic love. Plato talks about it a great deal in his dialogues, a sort of yearning of the soul for the realm of the gods. And it's come to us to be a sort of romantic love, though it's a beautiful love. Everybody has experienced eros in all of its beauty when you find some individual that is attractive to you and that you pour out all of your like and your love on that individual. That is eros, you see, and it's a powerful, beautiful love that is given to us through all of the beauty of literature; we read about it.

“Then the Greek language talks about philia, and that's another type of love that's also beautiful. It is a sort of intimate affection between personal friends. And this is the type of love that you have for those persons that you're friendly with, your intimate friends, or people that you call on the telephone and you go by to have dinner with, and your roommate in college and that type of thing. It's a sort of reciprocal love. On this level, you like a person because that person likes you. You love on this level, because you are loved. You love on this level, because there's something about the person you love that is likeable to you. This too is a beautiful love. You can communicate with a person; you have certain things in common; you like to do things together. This is philia.

“The Greek language comes out with another word for love. It is the word agape. And agape is more than eros; agape is more than philia; agape is something of the understanding, creative, redemptive goodwill for all men. It is a love that seeks nothing in return. It is an overflowing love; it's what theologians would call the love of God working in the lives of men. And when you rise to love on this level, you begin to love men, not because they are likeable, but because God loves them. You look at every man, and you love him because you know God loves him. And he might be the worst person you've ever seen.

“And this is what Jesus means, I think, in this very passage when he says, "Love your enemy." And it's significant that he does not say, "Like your enemy." Like is a sentimental something, an affectionate something. There are a lot of people that I find it difficult to like. I don't like what they do to me. I don't like what they say about me and other people. I don't like their attitudes. I don't like some of the things they're doing. I don't like them. But Jesus says love them. And love is greater than like. Love is understanding, redemptive goodwill for all men, so that you love everybody, because God loves them. You refuse to do anything that will defeat an individual, because you have agape in your soul. And here you come to the point that you love the individual who does the evil deed, while hating the deed that the person does. This is what Jesus means when he says, "Love your enemy." This is the way to do it. When the opportunity presents itself when you can defeat your enemy, you must not do it.

“Now for the few moments left, let us move from the practical how to the theoretical why. It's not only necessary to know how to go about loving your enemies, but also to go down into the question of why we should love our enemies. I think the first reason that we should love our enemies, and I think this was at the very center of Jesus' thinking, is this: that hate for hate only intensifies the existence of hate and evil in the universe. If I hit you and you hit me and I hit you back and you hit me back and go on, you see, that goes on ad infinitum. It just never ends. Somewhere somebody must have a little sense, and that's the strong person. The strong person is the person who can cut off the chain of hate, the chain of evil. And that is the tragedy of hate – that it doesn't cut it off. It only intensifies the existence of hate and evil in the universe. Somebody must have religion enough and morality enough to cut it off and inject within the very structure of the universe that strong and powerful element of love.

“I think I mentioned before that some time ago my brother and I were driving one evening to Chattanooga, Tennessee, from Atlanta. He was driving the car. And for some reason the drivers were very discourteous that night. They didn't dim their lights; hardly any driver that passed by dimmed his lights. And I remember very vividly, my brother A. D. looked over and in a tone of anger said: "I know what I'm going to do. The next car that comes along here and refuses to dim the lights, I'm going to fail to dim mine and pour them on in all of their power." And I looked at him right quick and said: "Oh no, don't do that. There'd be too much light on this highway, and it will end up in mutual destruction for all. Somebody got to have some sense on this highway."

“Somebody must have sense enough to dim the lights, and that is the trouble, isn't it? That as all of the civilizations of the world move up the highway of history, so many civilizations, having looked at other civilizations that refused to dim the lights, and they decided to refuse to dim theirs. And Toynbee tells that out of the twenty-two civilizations that have risen up, all but about seven have found themselves in the junk heap of destruction. It is because civilizations fail to have sense enough to dim the lights. And if somebody doesn't have sense enough to turn on the dim and beautiful and powerful lights of love in this world, the whole of our civilization will be plunged into the abyss of destruction. And we will all end up destroyed because nobody had any sense on the highway of history.

"Somewhere somebody must have some sense. Men must see that force begets force, hate begets hate, toughness begets toughness. And it is all a descending spiral, ultimately ending in destruction for all and everybody. Somebody must have sense enough and morality enough to cut off the chain of hate and the chain of evil in the universe. And you do that by love.

“There's another reason why you should love your enemies, and that is because hate distorts the personality of the hater. We usually think of what hate does for the individual hated or the individuals hated or the groups hated. But it is even more tragic, it is even more ruinous and injurious to the individual who hates. You just begin hating somebody, and you will begin to do irrational things. You can't see straight when you hate. You can't walk straight when you hate. You can't stand upright. Your vision is distorted. There is nothing more tragic than to see an individual whose heart is filled with hate. He comes to the point that he becomes a pathological case. For the person who hates, you can stand up and see a person and that person can be beautiful, and you will call them ugly. For the person who hates, the beautiful becomes ugly and the ugly becomes beautiful. For the person who hates, the good becomes bad and the bad becomes good. For the person who hates, the true becomes false and the false becomes true. That's what hate does. You can't see right. The symbol of objectivity is lost. Hate destroys the very structure of the personality of the hater.

“The way to be integrated with yourself is be sure that you meet every situation of life with an abounding love. Never hate, because it ends up in tragic, neurotic responses. Psychologists and psychiatrists are telling us today that the more we hate, the more we develop guilt feelings and we begin to subconsciously repress or consciously suppress certain emotions, and they all stack up in our subconscious selves and make for tragic, neurotic responses. And may this not be the neuroses of many individuals as they confront life that that is an element of hate there. And modern psychology is calling on us now to love. But long before modern psychology came into being, the world's greatest psychologist who walked around the hills of Galilee told us to love. He looked at men and said: "Love your enemies; don't hate anybody." It's not enough for us to hate your friends because—to to love your friends—because when you start hating anybody, it destroys the very center of your creative response to life and the universe; so love everybody. Hate at any point is a cancer that gnaws away at the very vital center of your life and your existence. It is like eroding acid that eats away the best and the objective center of your life. So Jesus says love, because hate destroys the hater as well as the hated.

“Now there is a final reason I think that Jesus says, "Love your enemies." It is this: that love has within it a redemptive power. And there is a power there that eventually transforms individuals. That's why Jesus says, "Love your enemies." Because if you hate your enemies, you have no way to redeem and to transform your enemies. But if you love your enemies, you will discover that at the very root of love is the power of redemption. You just keep loving people and keep loving them, even though they're mistreating you. Here's the person who is a neighbor, and this person is doing something wrong to you and all of that. Just keep being friendly to that person. Keep loving them. Don't do anything to embarrass them. Just keep loving them, and they can't stand it too long. Oh, they react in many ways in the beginning. They react with bitterness because they're mad because you love them like that. They react with guilt feelings, and sometimes they'll hate you a little more at that transition period, but just keep loving them. And by the power of your love they will break down under the load. That's love, you see. It is redemptive, and this is why Jesus says love. There's something about love that builds up and is creative. There is something about hate that tears down and is destructive. So love your enemies.

“There is a power in love that our world has not discovered yet. Jesus discovered it centuries ago. Mahatma Gandhi of India discovered it a few years ago, but most men and most women never discover it. For they believe in hitting for hitting; they believe in an eye for an eye and a tooth for a tooth; they believe in hating for hating; but Jesus comes to us and says, "This isn't the way."

“As we look out across the years and across the generations, let us develop and move right here. We must discover the power of love, the power, the redemptive power of love. And when we discover that we will be able to make of this old world a new world. We will be able to make men better. Love is the only way. Jesus discovered that.

“And our civilization must discover that. Individuals must discover that as they deal with other individuals. There is a little tree planted on a little hill and on that tree hangs the most influential character that ever came in this world. But never feel that that tree is a meaningless drama that took place on the stages of history. Oh no, it is a telescope through which we look out into the long vista of eternity, and see the love of God breaking forth into time. It is an eternal reminder to a power-drunk generation that love is the only way. It is an eternal reminder to a generation depending on nuclear and atomic energy, a generation depending on physical violence, that love is the only creative, redemptive, transforming power in the universe.

“So this morning, as I look into your eyes, and into the eyes of all of my brothers in Alabama and all over America and over the world, I say to you, "I love you. I would rather die than hate you." And I'm foolish enough to believe that through the power of this love somewhere, men of the most recalcitrant bent will be transformed. And then we will be in God's kingdom.”

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Some of Dr. King's many memorable words:

"Injustice anywhere is a threat to justice everywhere.

"The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.

"He who passively accepts evil is as much involved in it as he who helps to perpetrate it. He who accepts evil without protesting against it is really cooperating with it.

"An individual has not started living until he can rise above the narrow confines of his individualistic concerns to the broader concerns of all humanity.

"Life's most persistent and urgent question is, 'What are you doing for others?'

"Whatever affects one directly, affects all indirectly. I can never be what I ought to be until you are what you ought to be. This is the interrelated structure of reality.

"Philanthropy is commendable, but it must not cause the philanthropist to overlook the circumstances of economic injustice which make philanthropy necessary.

"True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring.

"It is not enough to say we must not wage war. It is necessary to love peace and sacrifice for it.

"Peace is not merely a distant goal that we seek, but a means by which we arrive at that goal.

"Nonviolence means avoiding not only external physical violence but also internal violence of spirit. You not only refuse to shoot a man, but you refuse to hate him.

"I have decided to stick with love. Hate is too great a burden to bear.

"I refuse to accept the view that mankind is so tragically bound to the starless midnight of racism and war that the bright daybreak of peace and brotherhood can never become a reality... I believe that unarmed truth and unconditional love will have the final word."

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Fund Notes

As of last week, the market has reestablished the most negative variants of nearly every “overvalued, overbought, overbullish, rising-yield” syndromes we follow. Even considering the effect of constructive trend-following measures and continued quantitative easing, we estimate a significantly negative prospective return/risk profile for stocks when the ensemble of present conditions is taken together. With commercial paper yields right near their 10-month average, we know of at least some normally insightful investors who seem willing to hold out for short-term yields to advance 10 or 12 basis points before abandoning a bullish stance. This may very well “keep it simple,” but in view of presently overextended conditions, it also inadvertently risks wandering into “stupid.” Einstein once said that things should be made as simple as possible, but no simpler. My impression is that an overreliance on aphorisms like “the trend is your friend” and “don’t fight the Fed” raises the likelihood of overstaying one’s welcome at the point that overvalued, overbought, overbullish, rising-yield conditions (particularly on longer-maturity debt) come into play.

Strategic Growth remains fully hedged here, with a staggered-strike position that raises the strikes of our index put options moderately closer to present market levels, at a cost of less than 1% of assets looking out to springtime. Strategic International also remains fully hedged, Strategic Dividend Value is hedged at about 50% of its stock holdings – its most defensive position, and Strategic Total Return presently holds a duration of about 3.5 years (meaning that a 100 basis point move in interest rates would be expected to impact Fund value by about 3.5% on the basis of bond price fluctuations, with about 10% of assets in precious metals shares, and about 5% of assets in utility shares.

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The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse.

Prospectuses for the Hussman Strategic Growth Fund, the Hussman Strategic Total Return Fund, the Hussman Strategic International Fund, and the Hussman Strategic Dividend Value Fund, as well as Fund reports and other information, are available by clicking "The Funds" menu button from any page of this website.

Estimates of prospective return and risk for equities, bonds, and other financial markets are forward-looking statements based the analysis and reasonable beliefs of Hussman Strategic Advisors. They are not a guarantee of future performance, and are not indicative of the prospective returns of any of the Hussman Funds. Actual returns may differ substantially from the estimates provided. Estimates of prospective long-term returns for the S&P 500 reflect our standard valuation methodology, focusing on the relationship between current market prices and earnings, dividends and other fundamentals, adjusted for variability over the economic cycle (see for example Investment, Speculation, Valuation, and Tinker Bell, The Likely Range of Market Returns in the Coming Decade and Valuing the S&P 500 Using Forward Operating Earnings ).