Monthly Archives: October 2015

Bogus GDP Growth Fools Investors

    Which is worse: Ordos style waste or U.S. Venture Capital (VC) funded Unicorns with negative gross margin? See a blog by Venture Capitalist Fred Wilson “And so most of the companies out there who are growing like weeds using a negative gross margin strategy are going to find that the capital markets will ultimately lose patience with this strategy and force them to get to positive gross margins, which will in turn cut into growth and what we will be left with is a ton of flatlined zero gross margin businesses carrying billion dollar plus valuations. And that is what Gurley and Moritz see when they look out into next year and the year beyond.” (Gurley and Moritz are

2017-01-10T23:33:12-08:00 October 30th, 2015|mayflowercapital blog|Comments Off on Bogus GDP Growth Fools Investors
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PuertoRico Bond Default Risk

   Municipal bonds in most states are rated investment grade by ratings agencies. During the 2009 recession California, New Jersey, Puerto Rico and Illinois had low ratings but were still labeled investment grade by ratings agencies. Generally speaking the best way to invest in municipal bonds is to avoid the riskiest ones which are those three states and Puerto Rico. The risk now is that Puerto Rico may have to go into default because it will run out of cash in November and when the December 1 payments are due that may be when defaults occur. They have no legal mechanism for government agencies to go into bankruptcy in Puerto Rico. Thus the default could result in difficult negotiations that

2017-01-10T23:33:12-08:00 October 29th, 2015|mayflowercapital blog|Comments Off on PuertoRico Bond Default Risk
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HiddenLabor  Market Weakness Means Fed To KeepRates On Hold

    The Fed had a meeting today and decided not to raise rates. A key part of the Fed’s rate decision based on labor market. The jobless rate is getting close to “Full Employment” and is still dropping thus in theory the Fed should raise rates to cool off the economy. But what has happened is that people have lost good jobs in the 2008 crash and have taken undesirable, shaky, low paying jobs out of desperation. Thus it is wrong to say that the economy is near full employment. The reason full employment may lead to inflation is if the workers are empowered in a nation of closed shop unionized jobs where powerful unions can threaten to shut down

2017-01-10T23:33:12-08:00 October 28th, 2015|mayflowercapital blog|Comments Off on HiddenLabor  Market Weakness Means Fed To KeepRates On Hold
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How To Cope With Low Yields

    The bond bull market was really two bull markets back to back. One was to get away from the high point of extreme outlier yields in 1982 when rates hit 14% for Treasuries and 22% for the Prime rate, to a reasonable level in 1992-1995. Then in 1997 with various global crisis and deflation from tech a new era of ultra-low rates began which could last as other eras did for roughly 35 years, which would be until 2032, so that’s another 17 years from now of low rates.     The Volcker Fed era from October, 1979 to mid-1987 was an statistical outlier era in U.S. history where real yields were often about 4% to 8% before tax; the

2017-01-10T23:33:12-08:00 October 27th, 2015|mayflowercapital blog|Comments Off on How To Cope With Low Yields
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Economy Topped Out. Crash May Occur in 2016

Some stock bulls have claimed that the economy’s recovery will last longer than normal because the seven year cycle allegedly didn’t start until a firm bottom had been reached a few years after the 3-2009 bottom. I disagree. I feel that much of the economic action in the economy comes from or should have come from giant and medium sized non-financial companies many of whom had deep pockets and plenty of liquidity and plenty of ability to qualify and get a loan or issue an investment grade bond. These companies choose to not expand because of a concern about the risk of over expansion. They had their chance to begin expanding at the 3-2009 bottom and

2017-01-10T23:33:12-08:00 October 26th, 2015|mayflowercapital blog|Comments Off on Economy Topped Out. Crash May Occur in 2016
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Does Behavioral Economics Justify the Fed’s QE program?

   The Fed’s lowering of rates assumes people either will be fooled in a non-emotional way or they will get emotional and make a leap of faith and over-consume because of the perceived value of low rates.  In economics and investing there is growing acceptance that emotions influence investors and consumers to act irrationally. However the degree to which emotions influence decision makers depends on the gravity of the situation. If the decision maker is trying to make a corporate growth decision like build a factory then most of the decision will be based on logic. If the decision maker is a retail investor with a busy career in a different field who spends an hour a day reading a

2015-10-23T16:49:00-07:00 October 23rd, 2015|mayflowercapital blog|Comments Off on Does Behavioral Economics Justify the Fed’s QE program?
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QE Can’t Lower Rates Enough To Stimulate the Economy

Quantitative Easing (QE) allegedly acts to lower interest rates. It does this in a rather indirect way by depriving bond investors and savers of yield so they may seek to invest in yield bearing high risk things like junk bonds possibly blending them with low yield investment grade bonds. The big misunderstanding about how QE lowers rates is that it doesn’t lower rates for investment grade borrowers or at least not enough to induce them to engage in demand creating massive purchase of plant, equipment and the hiring of employees. Instead these investment grade borrowers retrench and refuse to use low rates to expand because they know that the risk of not being able to repay principal is more important

2015-10-22T13:40:00-07:00 October 22nd, 2015|mayflowercapital blog|Comments Off on QE Can’t Lower Rates Enough To Stimulate the Economy
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How Should Human Capital Be Integrated Into One’s Investments?

   Investment theory says that one should hold bonds so as to diversify from risk-on assets and be able to buy stocks during a crash by selling bonds. Some financial planners claim that the nature of human capital (a person’s ability to earn income from working) is like a bond if they have a secure, reliable job. Thus some advisors claim that the bond-like nature of someone with highly secure job means that the investor can afford to have a higher than average allocation to stocks because of the bond-like nature of his personal “earned” income from working.     However, I disagree. For this to be true the worker must be willing to cavalierly abandon long term goals of retiring

2017-01-10T23:33:12-08:00 October 21st, 2015|mayflowercapital blog|Comments Off on How Should Human Capital Be Integrated Into One’s Investments?
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China Sold U.S. Treasuries: Will Bonds Crash?

China has been selling $250Billion of U.S. Treasuries, about 12% of what the central bank owns, but this is only 2% of all of our Treasury issues and this will be offset by growing demand for Treasuries in EM countries, including the private sector in China, to own G7 sovereign bonds. China’s sale is roughly the same as three or four months of the volume of Quantitative Easing that recently ended so it is not that much. As the U.S. economy gets better then the federal deficit gets smaller and thus less Treasuries are issued. This can create a recession in EM countries who view Treasuries as a type of global “money”. There have been suggestions by some economists that

2015-10-20T12:12:00-07:00 October 20th, 2015|mayflowercapital blog|Comments Off on China Sold U.S. Treasuries: Will Bonds Crash?
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Anniversary of Black Monday October 19, 1987 Crash

   28 years ago today stocks crashed 23% in two hours which was a statistical outlier that should have only occurred once every two billion years.    The lessons to learn from the crash include both positive and negative ones. The positive news is that despite crashes the economy can grow and recover, although one must be careful not to overpay for stocks, especially if they are in a bubble. They were not in a bubble at that time. One can also learn the importance of having a positive attitude despite the fear caused by the crash. I remember the crash very well, it was a dramatic moment.     The negative lesson to learn from the crash is that there

2015-10-19T09:03:00-07:00 October 19th, 2015|mayflowercapital blog|Comments Off on Anniversary of Black Monday October 19, 1987 Crash
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