Monthly Archives: January 2016

Japan Central Bank Starts Negative Interest Rate Program

This morning Japan started a negative interest rate program, which made investors flow into U.S. Treasuries. The 10 year U.S. Treasury yield dropped from 1.99% to 1.91% before leveling off at 1.93%. Negative interest rates don’t work and are dangerous because they could frighten the average unsophisticated consumer or investor and make them feel something bad is going to happen, in which case they would respond with lower consumer confidence and less consumption. They also are bad because they hurt retired people who depend on the yield of bonds and savings. These people will have to reduce consumption and sell off assets like houses and become a renter thus creating a downward spiral in asset prices. In Tokyo there are

2016-01-29T12:51:09-08:00January 29th, 2016|mayflowercapital blog|Comments Off on Japan Central Bank Starts Negative Interest Rate Program

Political Turbulence Increases Stock Market Risks

The rise of both Trump and Sanders are due to worker’s frustration with getting a shrinking share of the pie. Wages have not grown in real terms since the end of the 1980’s boom. These two candidates pose great potential risks for business, the economy and stock prices. These candidates could enact protectionist anti-import legislation that would raise domestic wages but create higher costs for consumers, leading to inflation. When inflation accelerates then interest rates will rise. The economy has become very financialized in the past 30 years as interest rates declined, becoming extremely dependent on a copious supply of very low interest rates. If rates rise then the well-oiled economic machine that is dependent on low rates may come

2017-01-10T23:33:03-08:00January 28th, 2016|mayflowercapital blog|Comments Off on Political Turbulence Increases Stock Market Risks

Is It Time to Buy Oil Stocks?

Some quality oil companies are selling at low prices with high dividend yields. Some people feel that it is better to catch a falling knife instead of waiting to try to find the absolute bottom. I have recommended that people avoid stocks until the SP is at 1200 or even at 935. However the possibility exists that oil is in its own economic cycle and has already reached a bear market capitulation point which would be the time to buy. Many companies have hedged their revenues and when the hedge contract expires then they will experience a deep, long term drop in revenues. For oil stocks to have reached a capitulation point a lot of weak oil companies would have

2016-01-27T10:54:27-08:00January 27th, 2016|mayflowercapital blog|Comments Off on Is It Time to Buy Oil Stocks?

Oil Crash Eventually Will Lead To Recovery

The oil crash will stimulate the economy and lead to a new mini-boom in other fields thus replacing lost jobs. However it’s not that simple. For example the purchases of capital equipment by an oil company may be permanently lost thus creating serious damage to the related industries that supply tools, etc. to oil companies. In the case of a business that used debt to buy capital goods to satisfy an oil company’s needs they will now be stuck with debt and loss of major customers. If a new post-industrial tech business opens up and creates jobs to replace the lost oil jobs that won’t be enough to help the struggling toolmaker nor will it help the oil company’s bond

2016-01-26T13:40:27-08:00January 26th, 2016|mayflowercapital blog|Comments Off on Oil Crash Eventually Will Lead To Recovery

Recessions and Stock Crashes

Many investors have been unduly influenced by the increase in stocks over the past 20 years and have a deep loyalty to the idea of buying on the dip and the idea if something goes wrong they will get a bailout. They should remember that even if the next recession is a light one that stocks can still fall simply because they are overpriced. There are three different overlapping criteria influencing stock values: GDP growth, corporate profit growth and PE multiples. If PE multiples are way too high (as they now are) then stocks could come down even if corporate profits and GDP growth are adequate. This is why a mild recession could make stocks go down by a much

2016-01-25T16:32:47-08:00January 25th, 2016|mayflowercapital blog|Comments Off on Recessions and Stock Crashes

Will The Next Recession Be a Low Risk Event?

Bullish advisors claim that since a repeat of the banking crisis of 2008 can’t happen because of reforms and regulations and a willingness to do bailouts that therefore the 2008 crash was an outlier that won’t happen again for many generations in the future. I disagree. It’s true that the government will bailout systemically important banks and other financial companies during the next recession. However that is somewhat of a moot point because risky financing programs have migrated to non-systemic non-bank entities like BDC’s, P2P lenders, Bank Loan mutual Funds, etc. These have not been fully tested in a deep recession and most likely will encounter a Lehman-like series of potential risks in the next generic recession. In the 2008

2017-01-10T23:33:04-08:00January 22nd, 2016|mayflowercapital blog|Comments Off on Will The Next Recession Be a Low Risk Event?

Nikkei Stocks Up A Lot: Should You Buy?

The Nikkei stock exchange in Osaka went up lot tonight and was up a lot in the past three years. Should you buy it? The problem is the PE10 ratio is roughly 22 versus a recent high of 27 in the U.S. before stocks went down in the U.S. A fair PE10 is around 15 and a good buying opportunity is around 10 or even better at 8. Thus Japanese stocks are too high. Additionally they fail to meet the very important Buffett-style standards of quality of earnings, return on equity, return on sales, etc. Many Japanese companies can’t even make 5% return on equity and many U.S. companies get over 10%. I believe the ratio of return on equity

2016-01-21T19:13:18-08:00January 21st, 2016|mayflowercapital blog|Comments Off on Nikkei Stocks Up A Lot: Should You Buy?

Do The Lower Capital Gains Tax Rates Make Stocks Go Up?

Some people claim that because taxes on long term capital gains and dividends are about 20% lower * than ordinary income then people will run from bonds and put money into stocks. If this was true it would have happened during the 2001 and 2003 Bush tax cuts. Instead stocks plummeted steeply in 2001 and took several years to come close to their old highs in 2007. The behavior of affluent taxpayers is that they may be able and willing to boycott work opportunities, especially for two income couples, if taxes are too high. They may refuse to both earn a living or to take on high risk, high yield things like junk bonds unless they have made arrangements to

2017-01-10T23:33:04-08:00January 20th, 2016|mayflowercapital blog|Comments Off on Do The Lower Capital Gains Tax Rates Make Stocks Go Up?

Stocks Getting Riskier

Today the SP index briefly hit an intraday low of 1864, a little below that of the 8-25-2015 dip and only 1% about the low of the 10-15-2014 Flash Crash. Jim Cramer, using advice from a technical analyst Carolyn Boroden at felt that 1830 is a key support level and if breached the market could be in for a 35% drop. I had felt uncomfortable with Cramer because I saw him as a bit of a permabull, so I’m glad he is being more flexible about the potential for a bearish outcome. Now the month is getting close to being 2/3rds over with and so it is highly likely that January will remain a bad month. Since the January

2017-01-10T23:33:04-08:00January 19th, 2016|mayflowercapital blog|Comments Off on Stocks Getting Riskier

Insurance Company Systemic Risk

I wrote that QE can create systemic risk for insurance companies which affects businesses that need mandated insurance contracts. This  is because negative interest rates would be damage an insurance company's portfolio like a house attacked by termites. Another potential hazard for insurance companies is that they may be lulled into a false sense of security that they can predict the volatility of volatility and thus take on an extra degree of risk issuing naked put options on risky events. I read online a business to business industry insider presentation by an insurance company where they claimed that studies show the volatility of the asset class volatility is stable and predictable so it is OK to invest in it. I

2017-01-10T23:33:04-08:00January 15th, 2016|mayflowercapital blog|Comments Off on Insurance Company Systemic Risk