Monthly Archives: November 2015

Can FANG Stocks Keep Propping Up The Stock Market?

In the past four months the NiftyNine or FANG stocks have broken away from the SP index and away from the SP equally weighted index. The NiftyNine are nine stocks (Facebook, Netflix, Google, Amazon, Starbucks, Priceline, Microsoft, Ebay, Salesforce) doing much better than the rest of the market. They act like the NiftyFifty stocks of the 1966-1973 market when stocks were going down but the NiftyFifty were going up. The NiftyFifty often had PE ratios of 60, about four times what is reasonable. They plunged deeply in the crash of 1973 and if one calculated the inflation adjusted decline in value then the decline was even worse since inflation was high in the 1970’s.   If the FANG stocks (FB,

2017-01-10T23:33:10-08:00November 30th, 2015|mayflowercapital blog|Comments Off on Can FANG Stocks Keep Propping Up The Stock Market?

Beta is Bad

Studies of stocks have shown that high beta stocks (high volatility stocks) underperform low beta stocks. The Financial Analyst Journal ran a study “Liquid Betting against Beta in Dow Jones Industrial Average Stocks”. Another author wrote a study “Betting Against Beta” by Frazzini and Pederson. In fixed income investing a similar phenomenon has been observed where the more volatile junkier assets, though appearing at first glance to have a higher total return, may end up with a lower total return than investment grade bonds. What happens is that unreliable, unsustainable investments may have brief upward spurts that lure in investors into buying them during moments of marketplace over-exuberance when they are overpriced. By contrast, the boring, conservative investments (either stocks

2017-01-10T23:33:10-08:00November 27th, 2015|blog|Comments Off on Beta is Bad

Higher Risk In Shadow Bank Loans Means Greater Recession Risk

The problem with central bank policy of Quantitative Easing and Zero Interest Rate Programs (QE and ZIRP) is that it lured fixed income investors into high risk junk lending in the form of P2P loans and BDC’s. These borrowers may be intrinsically unqualified and thus are wasting the money. Also they may unwittingly be engaging in a setup to failure by working on a failing business and getting deeper into debt and they may influence other people to engage in economic activity such as selling goods to their business. This may result in other vendors relying on continued demand generated by these extremely marginal business borrowers only to find that the demand suddenly evaporates when the loans default. By contrast,

2017-01-10T23:33:11-08:00November 25th, 2015|mayflowercapital blog|Comments Off on Higher Risk In Shadow Bank Loans Means Greater Recession Risk

Mutual Fund Distribution Tax Risk

    November and December are when mutual funds may do an annual distribution of capital gains. This is a taxable event. Ironically a fund can be in the process of going down in value yet be forced to issue a distribution. In that case the taxpayer is forced to pay tax even though his mutual fund is going down in value. The best way to handle this is to avoid owning appreciated mutual funds at the top of a bubble. When the bubble bursts then mutual funds get redemption requests and have to sell appreciated securities to meet redemptions. Their sale of assets is what triggers the issuance of a 1099 form about distribution income.    When a bubble is

2015-11-24T14:04:00-08:00November 24th, 2015|mayflowercapital blog|Comments Off on Mutual Fund Distribution Tax Risk

Why Central Bank Rate Manipulation Makes Things Worse

    A big misunderstanding is when people don’t see that ultra-low rates encouraged reckless shadow bank lending in the form of very risky P2P and BDC loans which will be extremely disappointing to the naïve investors who bought them. When these loans experience default can’t be cured by cutting rates since the reason their rates are high is because they need a massive spread over the riskless rate due to poor credit quality. To refinance a defaulted P2P loan, that yielded 15% before default. would probably require negative 10% risk free rates to motivate new investors to fund a refi for this class of borrowers. But why would anyone take on so much risk?    The great error of the

2017-01-10T23:33:11-08:00November 20th, 2015|mayflowercapital blog|Comments Off on Why Central Bank Rate Manipulation Makes Things Worse

Will Inflation Increase Thus Damaging Bonds?

   The CPI was 1.9% over 12 months, ex-oil in October. Assuming oil stays steady then going forward the CPI would be 1.9%. If one assumes oil will return to its old highs then of course inflation would be a concern. But look at the big picture. The rest of the world is teetering on the edge of recession, except for China which magically stimulates the economy by printing money and building unneeded empty buildings, which seems like that would eventually result in a recession once that policy burns out.     Assuming that cycles last roughly eight years then next year will be time for a new global recession, which would act to keep prices low. I remember in the

2017-01-10T23:33:11-08:00November 19th, 2015|mayflowercapital blog|Comments Off on Will Inflation Increase Thus Damaging Bonds?

The Trigger That Starts Recessions

   The key to the start of a recession is when the least qualified, very shaky borrowers get cut off from financing and default, raising default rates for the junk lending industry which then reacts by cutting credit lines to other B paper borrowers who then fail due to loss of credit and no cash. The key is that easy credit for shaky borrowers should never been granted and its withdrawal pulled the rug out from under that part of the economy. The overall economy may be unwittingly creating a setup to failure when B paper people start to get more financing and they place orders for business supplies, creating data points that the business community is expanding because of

2017-01-10T23:33:11-08:00November 18th, 2015|mayflowercapital blog|Comments Off on The Trigger That Starts Recessions