Monthly Archives: September 2015

Deferred Compensation: Is The Risk Worth Doing It?

Assuming someone saves half of their $300,000 salary in a Deferred Compensation plan offered by their employer they may save $100,000 a year inside their Deferred Compensation plan (after-tax on future withdrawals). Over ten years that’s an average of $500,000, before counting any increased account value, held by employer. If their net worth outside of Deferred Compensation (DC) is $1,000,000 then they are risking a third of their net worth on average. As they get closer to retirement their DC plan balance would grow to a larger percentage of net worth however as they get closer to retirement and closer to cashing in the DC plan then the risk of a far in the future loss

September 30th, 2015|mayflowercapital blog|Comments Off on Deferred Compensation: Is The Risk Worth Doing It?

Growing Weakness of Economy Shown in Prices of Junk Bonds, Small Cap Stocks

Yesterday Doug Short showed that per capita Real Personal Income less transfer receipts (PI-TR) went up from $50,300 in 3-2008 to $50,500 in July, 2015, thus for 7 years growth was negative until a few months ago. The annualized rate of gain is a hair over 0%, so it’s basically zero. Re the percent off from all-time highs, 3 of 4 indicators are at zero, and one is off 0.77%. The average of real big four indicators (industrial production, personal income, employment, sales) has been flat for 11 months. Note that it is normal to have at least a minimum of 2% real GDP growth. Failure to reach that means the economy hit stall speed and like an airplane that

September 29th, 2015|mayflowercapital blog|Comments Off on Growing Weakness of Economy Shown in Prices of Junk Bonds, Small Cap Stocks

Will The Federal Reserve Buy Stocks To Fix A Crash?

    When the SP finishes its downward move to half off of its all-time high (reached in 2015) in a year and the economy goes into recession what will the government do to stimulate the economy? The Federal Reserve can’t cut rates if they are at zero. They may try to raise rates very slowly this year by about 0.5% total over the next 12 months but usually rate cuts to cure the economy have been about 3% over a year, not a half percent. Thus the Fed cuts in 2017 won’t bail out the economy. The Fed might be tempted to use Quantitative Easing to stimulate the economy but political opposition to that is building from both sides of

September 28th, 2015|mayflowercapital blog|Comments Off on Will The Federal Reserve Buy Stocks To Fix A Crash?

What will happen to the online Social Media industry?

   The Social Media industry is designed to earn fees from advertising. If businesses find the advertising is not useful then Social Media will fail since ads would be cut. Except for Facebook Social Media is not making a profit nor is it making adequate sales growth. What is happening is that consumers are becoming too busy to read various posts or content in Social Media leading to “content shock” where consumers burnout and mentally tune out the flood of free information online. In a time starved hyper busy world consumers have no time to research a merchants claims carefully and no time to deal with human sales reps, thus they may seek to make a fast decision based on

September 25th, 2015|mayflowercapital blog|Comments Off on What will happen to the online Social Media industry?

Tightening Financial Conditions Explain Why Stocks Are Declining

   Financial conditions have tightened significantly since stocks (in the NYA index) reached an inflation adjusted peak in July, 2014. Goldman Sachs developed a Financial Conditions FCI index that went from 99.5 in July, 2014 to 106 recently. The increase in the index measures the impact of tightening financial conditions on the economy and includes the effect from foreign currency, and credit quality spread costs, etc. As the EM countries and the commodity export countries got weaker in November, 2014 there has developed a dichotomy between well run highly developed countries versus underdeveloped EM countries that have excessive growth that was fueled by a temporary and phony commodities boom which was greatly aided by the excessive use of debt.   

September 24th, 2015|mayflowercapital blog|Comments Off on Tightening Financial Conditions Explain Why Stocks Are Declining

Has PE10 Been Invalidated Because The Market Didn’t Go Low Enough in 2009?

    PE10 theory implies that when stocks crash hard with a very low PE of about 10 that they have reached a capitulation phase, which is the bottom when it is time to buy. This happened in 1932 and 1982 but not in 2009. What has changed is that there is so much government and central bank stimulus that this acted to prop up stocks in 2009 preventing them from falling to 500 points for the SP index. The SP bottomed in 2009 at 666 points.     Even if the low point for the bottom was artificially high in 2009 that doesn’t invalidate PE10 theory. What is very important is to avoid overpaying for stocks during a bubble and PE10

September 23rd, 2015|mayflowercapital blog|Comments Off on Has PE10 Been Invalidated Because The Market Didn’t Go Low Enough in 2009?

New SEC Rule May Damage Bond Funds Liquidity

    The SEC today required mutual funds and ETFs to make plans to ensure they can meet redemption plans during periods of massive selloffs. (The word “ensure” is not a correct word, since there is no way a mutual fund can “ensure” their investment.) The press has been writing a lot about how if every person who owned a bond mutual fund decided to panic and sell then the funds couldn’t sell off the assets and get cash to redeem a shareholder’s shares. If that happened it would create liquidity crisis.     But this is like saying if everyone drove at 5 pm on Friday to the mountains then there would be a massive traffic jam and so car manufacturers

September 22nd, 2015|mayflowercapital blog|Comments Off on New SEC Rule May Damage Bond Funds Liquidity

Disinflation and Deflation Risk Greatly Underappreciated

    I think best guess is that the stock market is now similar to the March, 2000 NASDAQ top and then after 6 months a double top will occur and then the market will go down. The dichotomy between the U.S. dollar and EM debtors is so great that it seems like it is a repeat of the Fall of 1997 when the EM countries suffered massive wave of devaluations and bank runs. So much risk exists that the typical bull doing momentum trading who is planning on using a stop loss order, and who secretly distrusts the U.S. stock rally, won’t be able to get out when the masses panic. Then it will be like October, 1987 except

September 21st, 2015|mayflowercapital blog|Comments Off on Disinflation and Deflation Risk Greatly Underappreciated

The Federal Reserve Decision Not to Raise Rates Today

    The Fed decided not to raise rates today. When they do raise rates it will take a while before it destroys the carry trade where speculators buy bonds using short term debt. A speculator can borrow at 1% and buy a bond yielding 3% and lever up 4 times the initial down payment equity in his account. That means the 2% spread is levered up and the speculator gets a 9% yield. A gradual rise in the cost to borrow will reduce this profit but not eliminate it. Thus initial rate rises won’t result in these positions being closed out so it won’t make long term bond yields go up. Also rising short term rates can hurt the economy

September 17th, 2015|mayflowercapital blog|Comments Off on The Federal Reserve Decision Not to Raise Rates Today