Monthly Archives: October 2016

Greater Political Risk For Stocks: Will It Cause A Crash?

The newly developing scandal regarding Clinton’s emails that started on October 28 creates a significant risk for the stock market. If another recession occurs then to reduce the risk of a deep stock market crash there would need to be a repeat of the bipartisan emergency stimulus programs similar to the ones that both sides agreed to during the September, 2008 Lehman crash. However, if a severe dispute between the two parties occurred because of a political earthquake caused by Clinton’s problems then this could mean that the two sides would have trouble working together to assemble a financial stimulus package. I believe stocks are substantially overpriced and that any substantial jolt to investors’ confidence could awaken them from their

2017-01-10T23:32:51-08:00October 31st, 2016|mayflowercapital blog|Comments Off on Greater Political Risk For Stocks: Will It Cause A Crash?

Real Per Capita GDP Near Zero If Adjust For Exports, Inventory Rebuild

Third quarter GDP was released today. It was up 2.9%, far more than the 1.15% rate for the first half of 2016. It has been nine quarters in a row with GDP not exceeding 2.9%. Much of the increase came from exports, improving by 0.8% and inventory rebuilding up 0.6%. Take these two out and GDP would have been 1.5%, about the same as the previous two quarters. Business capital spending, perhaps the best indicator of all, was down 2.7% annualized in the third quarter. For sixty years this only happened when the economy was in a downturn.  Corporate earnings declined at 3.3% year over year rate last quarter. This is important since earnings drive stock market values.    Economist

2017-01-10T23:32:51-08:00October 28th, 2016|mayflowercapital blog|Comments Off on Real Per Capita GDP Near Zero If Adjust For Exports, Inventory Rebuild

Bond Yields Spiked: What Will Happen When GDP Is Released?

Tomorrow the quarterly GDP figures will be released. This made bond traders nervous so yields went up sharply to 1.86%, some 10 basis points today for the ten year Treasury, making a Treasury ETF “TLT” go down in value by 1.1%. Typically the day before important data releases are scheduled the market gets nervous and does this. The fundamentals for bonds imply that they are fairly priced. The consensus view is that a recession is unlikely and that GDP, which has been 1.3% in the first half of the year, will go back to its four year average of 2.3%. However, my opinion is that troubles in OPEC countries, EU, and China imply that foreigners holding U.S. Treasuries may need

2016-10-27T16:17:50-07:00October 27th, 2016|mayflowercapital blog|Comments Off on Bond Yields Spiked: What Will Happen When GDP Is Released?

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

2017-01-10T23:32:51-08:00October 26th, 2016|mayflowercapital blog|Comments Off on Asymmetric Accounting Rules And PE10

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

2017-01-10T23:32:51-08:00October 25th, 2016|mayflowercapital blog|Comments Off on Do Active Managers Fail To Beat Indexes?

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

2017-01-10T23:32:51-08:00October 23rd, 2016|mayflowercapital blog|Comments Off on Helicopter Money Will Backfire Making Things Worse

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

2016-10-21T11:20:39-07:00October 21st, 2016|mayflowercapital blog|Comments Off on Federal Reserve Unable To Bailout Investors In The Next Crash

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

2017-01-10T23:32:51-08:00October 20th, 2016|mayflowercapital blog|Comments Off on Low Inflation Risk Versus High Risk of a Stock Crash

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

2017-01-10T23:32:51-08:00October 19th, 2016|mayflowercapital blog|Comments Off on Political Risk Low In U.S. and High Elsewhere

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

2016-10-18T14:43:41-07:00October 18th, 2016|mayflowercapital blog|Comments Off on Rates Likely To Stay At Current Levels For A Year or Two