Whoa Nellie!

Paying homage to Keith Jackson, He'd have certianly been exclaiming "whoa Nellie" after a day like this. My MFI stocks were up about 11%, a stunning number. It was my best day as an investor. Of course being up 10%, means instead of being down 50% so far this year, I am just down 45%! Hard to get too excited about that, but perhaps we're turning a corner. The central banks and the governments of the world have been bringing out "the heavy artillery" to turn the battle. A concerted effort might just work.

As faithful readers (are there any other kinds?) of this blog might note, I have been providing links to the Hussman funds the past few weeks as he has been spot-on in his calls on the market. There are some people who are bearish and careful all the time (reminds me of a funny quote from "The lack Swan", where traders claimed he was so cautious that he probably would not even cross the street. His reply was that he crosses the street, he just doesn't cross it blindfolded!) I'd say we have had some hedge funds and investment banks croissing the street blindfolded of late. Anyway, back to my train of thought about Hussman. This morning he actually said his report could be freely distributed, so I'll cut and paste a couple key points (with my comments in italics):




October 13, 2008

Four Magic Words: "We Are Providing Capital"

John P. Hussman, Ph.D.
This week's comment may be distributed freely without further permission

I want to begin this comment with three questions:

1) How many people do you know whose bank has failed and have had any difficulty recovering their deposited funds? Anyone?

2) Do you personally know anyone whose money market fund has “broken the buck” and has not received the full assurance of the government that their claims will be paid in full?

3) Have you yourself had any difficulty making any transaction (not tightly related to your personal credit rating) in any aspect of daily life such as credit card purchases, grocery, gas, shopping, or for any other purpose?

The point of these questions is certainly not to deny that credit – particularly commercial paper and interbank lending – is extraordinarily tight. These markets are quite short-term in nature; generally between overnight and 30-60 days, but they are also markets in which central banks are providing extraordinary amounts of liquidity to ease those constraints. Rather, the point of these questions is to to remind investors that upon reflection, virtually all of the panic that people have about the credit markets is borne of fearmongering, and not based on personal experience. This crisis has certainly caused major difficulties for the owners and employees of unsound institutions, but generally speaking, the customers have not been affected.

I have several assertions here. As a reputed “perma-bear” that has pointedly warned about the collapse that we're observing now (e.g. “A Who's Who of Awful Times to Invest” – July 16, 2007), I hope these assertions will carry some weight.

The only thing we have to fear is the fearmongering of Wall Street itself

Look – a few weeks ago, there was a $700 billion pile of money on the table, but the only way for Wall Street and bureaucrats to get their paws on it was to scare the public out of its collective gourd. They succeeded, but created the psychology that the U.S. was on the verge of depression if the bailout wasn't passed. Having created that psychology, the crisis took on a life of its own.

(note Hussman's suggestion that bringing the "crisis" to political centerstage made things worse and explains even further the sharp sell-off.)

I have argued since 2003 (e.g. “Freight Trains and Steep Curves”) that the U.S. financial system was pushing toward major credit difficulties. Earlier this year (“Which Inning of the Mortgage Crisis Are We In?”), I noted that the eye of the storm would pass just about where we are today. These difficulties were largely expected. In response, the badly reasoned and childish panic coming out of Wall Street analysts these days is an embarrassment to the investment profession.

Word to the wise - don't accept advice or analysis about this crisis from anyone who failed to anticipate it in the first place. The people warning about Depression now (or even talking about it casually on the financial channels) are the same reckless jackasses who told investors that stocks were cheap and “resilient” at the highs. (I have to think he is referring to Cramer here, though Cramer was warning about the financial meltdown a year ago)

Stocks are now measurably undervalued

Investors will berate themselves for the panic they are now exhibiting. This, from an advisor that has adamantly argued for over a decade (with the exception of 2002-2003) that the stock market was strenuously overpriced and likely to deliver disappointing long-term returns. My impression is that investors who abandon properly diversified and carefully planned investments here, with the stock market already down by nearly half, will regret it as the emotionally panicked decision that wrecked their retirement prospects.

Long-term shareholders will recognize the following chart, which is an update of our 10-year total return projections for the S&P 500 Index ( standard methodology ). The heavy line tracks actual 10-year total returns. Note that the total return for the past decade has been zero, right in the mid-range of what we projected at the time. The green, orange, yellow, and red lines represent the projected total returns for the S&P 500 assuming terminal valuation multiples of 20, 14 (average), 11 (median) and 7 times normalized earnings. Stocks are now at the same valuations that existed at the 1990 bear market low. Relative to 30-year Treasury yields, the S&P 500 is priced to deliver the highest excess return since the early 1980's...

Hussman goes on, if you want to read the whole thing, here is the link (
October 13, 2008 - Four Magic Words - "We Are Providing Capital"). It is certainly food for thought.

I did buy EGY today at $4.50 as an MFI stock. I think oil will bottom with the stock market bottoming. At $80 a barrel EGY is still worth way more than $4.50 AND they have some good prospects. Here is a quote from their recent earnings report:

Exploration Summary

VAALCO currently has six producing wells in offshore Gabon, West Africa: four in its Etame field and two in the Avouma / Tchibala fields. To support continued growth, the Company is planning seven development and exploration wells over the next three to eighteen months, exposing the Company to over 50 million net barrels, or an 8-fold potential increase to VAALCO's current 6.2 million barrels of proved reserves.

I have to admit, that 50 million number does get me salivating. Of course it is unrealistic to expect the full 50 million, but even 20% of that is 10 million barrels at $80 a barrel is $800m. This is a company with a market cap under $300m.

My other big buy (besdies my VR success, which was on Friday) was OKS (not MFI) at $39. It jumped today (with a Barron's weekend plug) to $46 or so.

Ok, enough rambling. Hopefully a year from now, Dr Hussman will be right and we'll recognize that this WAS a tremendous buying opportunity.