Asymmetric Accounting Rules And PE10

Valuing companies is based on analyzing their income streams and then capitalizing them. A significant problem in this is deciding what to do with amortization of goodwill from acquisitions. When a company buys another company they usually pay far more than the value of the tangible items. This excess cost is called Goodwill and is the intangible value of the company’s following of loyal customers. The reason CPAs make the acquiring company write down Goodwill is because the acquirer could overpay for it or because the customers could decide to switch to the competition. In an era of radical new disruption to business models through technology and globalization there is a risk that customers may defect and thus goodwill should

October 26th, 2016|mayflowercapital blog|0 Comments

Do Active Managers Fail To Beat Indexes?

        Imagine an index of single family rental homes. Suppose half of them were owned by landlords who refused to buy insurance. The profits earned by uninsured landlords would be higher than the average properties’ profits unless they had a fire. The half of the landlords who insisted on being insured would underperform the index, unless a major fire occurred. If you don’t want to or are unable to buy insurance then an alternative is to try to reduce risk which is what many active investment managers do. Reducing risk means buying lower risk companies, which may be seen by the general public as wimpy underperforming stocks. In securities investing managers try to avoid excessively risky stocks and may end

October 25th, 2016|mayflowercapital blog|0 Comments

Helicopter Money Will Backfire Making Things Worse

People who advocate massive central bank money printing to finance growth through government deficit spending for make-work projects should consider the possibility that it won’t work. The massive Fed Quantitative Easing and money printing after the 2008 crash may have helped inflate stocks, real estate and mortgages, but the effect of reflation on goods and services used in everyday life would be very different. If massive money printing was used to generate consumer demand then inflation would break out and then interest rates would rise, making it harder for business to expand and dampening consumer demand. Rising rates would seriously damage the stock market since interest rates are used in a discounting mechanism to estimate the value of stocks. A

October 23rd, 2016|mayflowercapital blog|0 Comments

Federal Reserve Unable To Bailout Investors In The Next Crash

The Federal Reserve is trapped in a situation where they wish they could raise rates just so they could have some ammunition in terms of the future ability to cut rates during next recession. They will need to cut rates 4% (which would result in rates at negative 3.5%) to stimulate but to do so they have to first raise them 3.5%. But that would create a recession and destroy their credibility. During the next crash they might be tempted to think that propping up stock prices by buying stocks would somehow help the economy. To do this they would need to get the law changed. But Republicans  in the House of Representatives tend to be Hard Money types that

October 21st, 2016|mayflowercapital blog|0 Comments

Low Inflation Risk Versus High Risk of a Stock Crash

There is adequate evidence that the risk of inflation is receding and thus interest rate risk from bonds is a reasonable risk as long as one avoids a high duration in their portfolio. Dave Rosenberg said recently about inflation that CPI ex-shelter was negative 0.1% last month, we had 5 months of this since 2009 crash, it occurred 6% of time since then versus 3% of the time in a normal cycle. CPI ex-food, shelter, and energy up 1.3% YoY, the softest data point in 2016. Most of inflation is in shelter costs. Ex-energy CPI was up 0.1% last month.  My opinion about shelter costs is that much of it, for existing homeowners, is hypothetical since it is fixed for

October 20th, 2016|mayflowercapital blog|0 Comments

Political Risk Low In U.S. and High Elsewhere

My estimate for politics is that there will be no change in the current situation where Democrats control the White House and Republicans control Congress, subject to the filibuster limits, etc. If no political change occurs then little or no tax increases or stimulation program increases will occur. Corporations have become accustomed to squeezing a profit out of a slow growth economy. Many consumers who are on tight budgets have been able to continue to stretch their spending through uses of alternative lending such as P2P, or student loans or Easy Qualifier (no income documentation) car loans and credit cards. Thus it is tempting to think the current overstretched situation can go on forever. It can’t. At some point some

October 19th, 2016|mayflowercapital blog|0 Comments

Rates Likely To Stay At Current Levels For A Year or Two

If lowering interest rates doesn’t transmit benefits to those most in need and damages future retirees, pension beneficiaries, life insurance companies, banks, etc., then perhaps there is no significant benefit in further lowering of rates. The old rule of thumb that the Fed has to cut rates 4% to stimulate would imply that the economy needs negative rates but this is not feasible because of behavioral economics consumers won’t tolerate this in terms of how it would affect insurance, bank accounts as well as pensions. Ultra-low rates can provoke naïve investors into foolishly lending to junk bond type of borrowers such as undocumented P2P loans, BDC’s, etc., but on a risk-adjusted basis these are bad for investors who were planning

October 18th, 2016|mayflowercapital blog|0 Comments

PE10: Is Its Use of Corporate Earnings Accurate?

In recent years critics have tried to dispute the Shiller PE10 theory by claiming that corporate earnings in recent years have been made unfairly low because of an increase in overly strict rules imposed by CPA auditors. The theory is that one time wrote offs charged off during a recession shouldn’t be counted as a form of reduced earnings and the bullish advisors believe if these write-offs were not counted then earnings would be higher and PE ratios lower and thus stocks more reasonably priced. The problem with not counting charge offs of bad business projects is that when these projects were new they were viewed as profitable long term projects and their profits were used to calculate corporate earnings.

October 17th, 2016|mayflowercapital blog|0 Comments

Gridlock During the Next Recession To Trigger A Stock Crash?

Assuming the Republicans keep control of the House of Representatives after the election then they may be able to participate in the joint creation of gridlock  because of an inability to get along with Clinton and thus they will avoid tax increases next year. This could prevent a tax increase that would trigger a recession. It may be tempting for investors to conclude that there won’t be any changes and thus stocks won’t crash. But since stocks are overpriced (and need to drop 45% from their top to reach fair value) and the economy is at a 1.9% GDP this quarter (estimated) and has been logged in at 1.3% annual GDP growth for the first half of the year then

October 17th, 2016|mayflowercapital blog|0 Comments

Long Term Trends As A Result of The Demise of Quantitative Easing

A huge generational shift is taking place in the financial markets as Quantitative Easing (QE) and other monetary policy experiments are terminated and replaced with fiscal stimulus. The era of 1996-2016 saw the debt to GDP ratio in the U.S. double from a century long range of 125% to 175% before 1997 (excluding WWII) to the current 345%. The era of the past 29 years since the crash of 1987, which resulted in Greenspan cutting rates to help stocks, has been one of central bankers rushing to help stocks. Investors have become brainwashed over the past 20 years to believe that it is their right and the Fed’s duty to make stocks a low risk proposition and thus they have

October 17th, 2016|mayflowercapital blog|0 Comments