When you value stocks on the basis of the cash flows that shareholders can actually expect to have delivered into their hands over time, it's still possible to find values, but we find no support for the notion that stocks are cheap as an investment class. All of this will change eventually, but unfortunately, what investors do not learn voluntarily is inevitably taught to them against their will.
Market Climate
As of last week, the Market Climate was characterized by unfavorable valuations and unfavorable market action. Last week's rally satisfied some fairly "obligatory" technical expectations, but also extended far enough to clear the recent oversold condition of the market. As I've noted in the past, the most dangerous point in the stock market is where the Market Climate is negative and stocks have cleared an oversold condition, because it opens the potential for nearly vertical declines. At the same time, we do have the first wave of second-quarter earnings scheduled this week, and given the sensitivity of technical traders to various "trigger" levels, even a one-off positive report might be enough to get the market close to one trigger or another, provoking at least a brief short squeeze. Suffice it to say that the hyperfocus of traders on various support and resistance levels here makes it difficult to form any short-term views regarding market action. For now, we remain tightly hedged.
In bonds, the Market Climate was characterized last week by moderately unfavorable yield levels and favorable yield pressures. We continue to carry a duration of about 4 years in the Strategic Total Return Fund, with a small allocation to precious metals shares, utility shares, and foreign currencies. I continue to believe that the potential downside in gold exceeds the level that large holders are likely to experience comfortably, and would not be at all surprised to see a 30% loss in gold prices in the event - likely in my view - that deflation concerns emerge. For our part, the few percent of assets we've currently allocated to the precious metals sector is a sufficient hedge against the absence of fresh credit strains, but a more aggressive stance at present would require some abatement of the economic risks we observe.
Copyright (c) Hussman Funds
