Zeev's Turnips Patch-No Politics (ZEEV)

[Ace Hanlon]

Hussman's new hedging tactics:



The Market Climate remains on a Warning condition here, but Monday was a good start in delivering the broad advance we would require in order for that
Climate to shift to a favorable stance this week. As I noted last week, we have no anxiety about the possibility that the market may rally more strongly
before we shift our position. We take our actions when we have sufficient evidence, and not before.

That said, the essence of good hedging is to set up an asset and a liability having similar character and timing. Once the market had plunged sufficiently to
create the strong possibility of a near-term momentum reversal, we faced a "contingent liability." Namely, contingent on a strong market rally prior to about
mid-August, we would be obligated (by virtue of our investment discipline) to buy market indices in an amount equal to about 40% of assets, to uncover
part of our hedge. The appropriate way to manage that somewhat undesirable contingent liability was to create an offsetting contingent asset having the
same character. Specifically, we needed an asset that would deliver market indices if a strong rally occurred prior to mid-August, but not otherwise. The
appropriate asset in this case was inexpensive, out-of-the-money August call options. We purchased enough near last week's lows to lift off about 40% of
our hedges if a powerful rally arrived, at a cost of less than 1% of assets. Importantly, this move was strictly a hedge (or to be oddly accurate, a hedge
against our hedge), not a speculation or "bet" that such a rally would actually arrive. Needless to say, if the market rallies further, we will be taken cleanly
into a constructive market position, closing out 40% of our hedges. Otherwise, we will remain fairly neutral to overall market fluctuations.

Keep in mind that we are professional stunt men. Don't try this at home.

I continue to have no opinion regarding short-term action. Monday's rally was strong enough to nearly clear the extreme oversold condition of last week.
So we are now in an important area, and it is essential for the market to hold onto its gains this week, or to rally even more strongly next week. Otherwise,
as I noted on Sunday, the prospect for a favorable near-term shift in the Market Climate may be lost.

For now, we remain well hedged, but about 40% of our hedges are offset with inexpensive call options. This leaves us with a reasonable expectation of
participating in any advance that occurs prior to a favorable Climate shift, while also keeping us hedged in the event that the market turns down instead. In
all, we remain comfortably aligned with the prevailing Market Climate.