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The Return of 'Graveyard George'

While most professionals believe the market is headed higher, George Huntley disagrees. He's convinced the pieces are in place for continued deterioration of the economy, and he offers some persuasive reasons to document his case.
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When I was 10 or 11, I went to my first sleep-away camp in upstate New York. One of the more intriguing characters there was a counselor, "Graveyard George," who was so nicknamed because of all the scary stories he would rattle off to campers prior to bedtime. Graveyards were frequently included in his tales of horror.

I thought of George the other day after wrapping up about a 40-minute chat with Jason Huntley, the chief investment officer of AdvisorShares' Mars Hill Global Relative Value in Colorado Springs, Col., the first actively managed exchange-traded long and short fund (symbol: GRV) listed on the New York Stock Exchange.

Huntley, bright, brainy, amiable and a wine lover to boot, is just the kind of guy I enjoy gabbing with, but he's also a scary fella. Pointing to a fair number of ticking time bombs, he basically argues that too many investors are at risk of being swallowed up by economic and financial quicksand.

Employing a hedge-fund strategy -- that is, betting certain investments will go up, while others will go down -- Mars Hill Global looks to be fully hedged on a dollar basis. At maximum, it can be 50% short or 50% long. Currently, the ETF's portfolio is exhibiting a decidedly bearish stance with a 25% net short position that Huntley says he would like to enlarge to maybe 50%.

Huntley, 38, who has been in the money management game since 1994 and opened Mars Hill Global (assets: $45 million) in July, is not one of those end-of-the-world guys screaming fire to grab headlines with dire predictions of a depression or a massive drop in the Dow to 1,000.

While most professionals believe the market is headed higher, Huntley strongly disagrees. Rather, he's convinced the pieces are in place for continued deterioration of both the economy and the stock market, and he offers some persuasive reasons to document his case.

Among the factors that lead him to take a negative posture are excessive leverage, structural unemployment, mounting housing problems and the refusal of banks to lend because they see accelerated writedowns of poor housing loans.

Likewise, slower growth out of Europe and the risk that U.S. and European financial and economic problems could blunt a global recovery.

The clear and present danger here, as Huntley sees it, is that financial risks are growing.

Yet, he notes, investors are pressing the pedal on risk, having bid up stock prices about 10% to 12% since Sept. 1. Ridiculing this rise, Huntley describes it as "a heightened level of complacency that's downright dangerous."

Why so? Because, he says, Wall Street is too exuberant in its expectations of economic growth, which, means that earnings expectations are also excessive.

Over the past 18 months, he points out, companies have squeezed out a lot of profit margins, primarily at the expense of reduced jobs. But you can't keep squeezing and squeezing forever, he says.

Add to this, he observes, are no underlying demand or underlying growth, signs of inflation from rising food, energy and health care prices, the unwillingness of the consumer to spend on a discretionary basis, deteriorating macroeconomic fundamentals and the fact the housing and job markets stink.

To Huntley, it means "at some point in 2011, we'll see a double-dip recession and GDP will turn negative." Or, in simple language, things will get worse before they get better.

What about the Christmas shopping season? Huntley, who also owns a stake in a winery in Walla, Walla, Wa., isn't saying Santa will be a no-show, but he does expect him to be pretty frugal, noting "this is not a jovial environment for busy holiday spending."

Translating all of this into the performance of the stock market, our grizzly figures global equities are vulnerable to about a 10% to 15% decline between now and year end, with the U.S. and Europe especially vulnerable. Or, he says, if the Bush tax cuts are not extended, we could see a very fast 10% to 15% correction.

Looking ahead to 2011, Huntley sees "a very difficult year" for the market, characterized by increased volatility, a further decoupling of emerging markets from the developed markets and very little in the way of expected returns.

Apparently, he's not alone in his fears, what with jittery investors having pulled out an estimated $20 billion worth of domestic stocks in September.

On the political front, Huntley expects Obama to be a one-term president because, he says, he's made too many mistakes and has failed to bring about the positive changes he promised. He also expects Republicans to capture the House in the impending midterm elections, which means, he says, very little will be done in the remaining days of Obama's presidency in the way of fiscal stimulus and government spending.

Mars Hill Global, by the way, doesn't buy or short individual stocks, preferring instead to use ETFs to take investment actions.

Its short positions are heavily focused on financials, notably through ETFs sporting the symbols IAI, KRF, XLF and EUFN, a European financial ETF.

Huntley is especially bearish on Citigroup, describing the banking biggie as "a house of cards that will eventually collapse." Adds our Citigroup bear: "The stock is being artificially propped by the government and questionable accounting rules and I wouldn't touch it."

The ETF's long positions center primarily on Russia and China and such small Asian countries as Malaysia, Indonesia and Thailand.

So there you have it -- the "graveyard George" of the investment arena. What makes it so scary is that if Huntley's right, we could all soon get an unhappy insight into what financial graveyards are all about.

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