“Still, given sufficient evidence of broad improvement in market action (which we take as a measure of risk tolerance and economic expectations), we wouldn’t fight the combination of roughly fair values and a willingness of investors to bear risk. We’ve been carrying small “contingent” call option positions for a good portion of the recent advance. This helped to compensate for our low weightings in financials, homebuilders and other low-quality sectors that have enjoyed frantic short-covering. Still, with only about 1% of assets currently in those calls, our stance is still characterized as defensive here, as we are otherwise fully hedged. Again, we won’t fight a broad improvement if it continues sufficiently, but if I were to make a guess, it would be that the potential downside in the S&P 500 from these levels could approach 30-40%. That is not a typo, and it is not a possibility that should be ruled out.”
Read the full weekly commentary by clicking the link above, basically a continuation and recap of his commentary last week.
Hussman, as do I, believes the Geithner PPIP plan is irresponsible and doesn’t solve any of the underlying issues. Hussman has gotten a lot of media attention as the media has finally noticed that taxpayers have been bailing out financial bondholders and counterparties despite the fact that the bondholder knew the risks they faced. The FDIC will foot the bill, without congressional approval.
I’m not sure I think stocks will go down 40%, but nothing can be ruled out these days (including a further rally).
Scott Dauenhauer CFP, MSFP, AIF
Meridian Wealth Management