Monthly Archives: July 2015

Employment Cost Data Shows Disinflation Theory is Correct

   The Employment Cost Index was released today with a gain of only 0.2%. Today’s data is a relevant piece of evidence supporting the disinflationary theory of a weak economy recovery, in part due to globalization lowering U.S. wages. The rising dollar accentuates this problem as more employers will increase the use of offshore workers. This is because there was a drop in commissioned income and a decline in unionized jobs that have employer paid pensions. Bullish economists are trying to claim this was a statistical aberration but closer inspections shows these two items were part of a disinflationary/deflationary trend. First, during hard times workers may have to resort to taking on more risk so they may seek to earn

2017-01-10T23:33:15-08:00July 31st, 2015|mayflowercapital blog|Comments Off on Employment Cost Data Shows Disinflation Theory is Correct

Interpret GDP Carefully to Avoid Being Fooled By Bubbles

  The 2nd quarter GDP figures were released today. The economy grew the slowest during a post-recession recovery period ever since 1945. When some economists try to justify their bullish opinions they sometimes resort to saying that GDP doesn’t properly record economic activity because less things are done physically and increasing more economic activity is done by intangible services.  The allegation is that the economy is stronger than it appears because a company was forced to immediately expense it software development cost even though it might act like a capital asset and last for several years.  But I disagree. The tech world is rapidly changing and full of small micro-experiments where risks are taken on new product lines that don’t work

2017-01-10T23:33:15-08:00July 30th, 2015|mayflowercapital blog|Comments Off on Interpret GDP Carefully to Avoid Being Fooled By Bubbles

Facebook Earnings Released: Should You Buy Tech Stocks?

   Facebook quarterly earnings were released today. The company saw revenue rise 39% and expenses rose 82%. Net profit declined 9% to 25 cents a share in the 2nd quarter. Annualized that’s a $1 a share income for a stock trading at $97 or a PE ratio of 96 instead of a more traditional ratio of 15. Thus based on traditional metrics Facebook is worth $15 a share plus a growth factor. Assuming the company can double its revenue over several years before the rate of growth hits a plateau then perhaps the company’s profits will grow enough to justify a stock price substantially higher than the overly simplest PE formula that indicates a $15 value. But it is an

2017-01-10T23:33:18-08:00July 29th, 2015|mayflowercapital blog|Comments Off on Facebook Earnings Released: Should You Buy Tech Stocks?

No Recession For Four More Years: Should You Buy Stocks?

Ed Yardeni said the next recession might not start until March, 2019 which is based on assuming the growth phase doesn’t start at the bottom of a recession but rather starts after the recession has ended and growth has returned to normal which he marks at 2013 rather than 2009. Suppose this theory is correct and the next recession begins at that point. The simplistic assumption might be that since markets anticipate economic news a half year early then perhaps stocks will crash September, 2018.    But if stocks are overvalued right now and the real economy grows at roughly 2.5% a year for four more years that’s a 10% bigger economy with 10% more corporate earnings which in theory

2015-07-27T14:43:00-07:00July 27th, 2015|mayflowercapital blog|Comments Off on No Recession For Four More Years: Should You Buy Stocks?

The 4% Rule: Will It Get Reduced to 3% Because of Deflationary Crashes?

   In financial planning for retirement the industry has a 4% rule of thumb that suggests that a person retiring at age 65 and living to 95 could have an annual safe withdrawal rate of 4.25% of their portfolio on an inflation adjusted basis. But if the bears’ predictions of low returns are true then should people revise this rule down to 3%? If so, then retirement portfolio income would be roughly 30% lower, although Social Security would be unchanged.    The 4% rule is based on assuming that a repeat of the Great Depression could happen and it assumes a blend of good and bad decades. Only in a few simulations does the 4% rule result in a hypothetical

2017-01-10T23:33:18-08:00July 24th, 2015|mayflowercapital blog|Comments Off on The 4% Rule: Will It Get Reduced to 3% Because of Deflationary Crashes?

Commodities Crash Hints at Stock Crash

   The market is sending out recessionary signals with copper down to $ 2.38 a pound in the spot market, it broke through the $2.40 support level and is down nearly half from the 2011 high. The 10 year Treasury yield went down to 2.27% today to close at 2.28% down 4BP from yesterday and is now below the 50 DMA. New claims for unemployment are at record lows, which is a sign of an economic cycle top.    Perhaps the coming Federal Reserve rate hike that may occur in September will push the dollar up even higher and create even more pressure on EM countries. The unemployment in EM countries suddenly went up from 5.3% to 5.8%. China’s growth

2015-07-23T14:39:00-07:00July 23rd, 2015|mayflowercapital blog|Comments Off on Commodities Crash Hints at Stock Crash

Bonds Riskier Than Stocks?

   Bonds are risky-get me out! This month investors have worried about bond prices going down. In the old days when people thought of a bond they were thinking about a 30 year fixed rate bond which could be damaged by inflation. But if someone bought a bond portfolio with duration of three years (duration is a similar concept to maturity) then that is, on a spectrum between zero duration and 30 year duration 90% of the way towards zero duration. Typically I recommend to clients to invest in bonds based on portfolio durations of about 3 or 4. If the economy fully recovers and switches to inflation in three years then the three year duration provides a considerable degree

2017-01-10T23:33:18-08:00July 22nd, 2015|mayflowercapital blog|Comments Off on Bonds Riskier Than Stocks?

Why Did Rates Rise from 3% to 25% For One Borrower?

   The interest rate on a Swiss loan to a French city went up from 3.6% in 2007 to 25.3% because of the massive increase in the value of the Franc, according to the Wall Street Journal. It seems that many municipal bond issuers throughout the world have naively entered into complicated contracts where they are obligated to pay a much higher rate if some variable like interest rates or foreign currency fluctuates a lot. In return for agreeing to accept this risk the municipality gets an artificially low initial interest rate.    Often this is done where the borrower agrees to do some economic action which is like selling a naked put option. The borrower earns an upfront put

2015-07-21T14:32:00-07:00July 21st, 2015|mayflowercapital blog|Comments Off on Why Did Rates Rise from 3% to 25% For One Borrower?