Monthly Archives: December 2018

Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

   Stock buybacks remind me of the mortgage backed securities bubble of 2008 where banks sold packages of loans to other banks, creating a debt and real estate bubble. One bank would create poor quality loans, get an inflated rating from a ratings agency, package the loans into securities and then sell them to another bank, where the seller alleged they were investment grade bonds. The new owner of the loans could then tell regulators that the bank owned securities were rated “AAA” by ratings agencies, thus passing a bank regulator exam when instead they should not have passed the exam. This fueled the 1997-2007 housing bubble, and created the illusion of economic growth and stability when instead it was

2018-12-28T17:13:57-07:00December 28th, 2018|mayflowercapital blog|Comments Off on Stock Buy Backs Like Mortgage Backed Securities Bubble of 2008

Fed Raises Rates, Market Cuts Them

         The Federal Reserve raised the short term fed funds rate by 0.25% today. The Fed funds rate of 2.5% is higher than the 3 month T-Bills rate of 2.35%, thus inverting part of the yield curve. The 2 year Treasury yield inverted, becoming higher than the 5 year Treasury yield. The difference between the 2 year and 10 year Treasury are only 11 basis points, so they entire yield curve is moving towards inverting. The 30 year Treasury bond’s yield dropped below 3.0%. Stocks crashed hard making new lows for the year. Many stock market charts show technical trading indicators, such as trendlines and momentum, that have been broken, thus leading to a full stock market correction. A plunge

2018-12-19T14:21:37-07:00December 19th, 2018|mayflowercapital blog|Comments Off on Fed Raises Rates, Market Cuts Them

Stock Market Today Seriously Damaged By Broken Trendlines

    The market dropped today; the SP was down 1.91%, the DJ Transports index broke through a support line on a chart and reached new lows for the year. The ValueLine Geometric index (Ticker VALUG) broke through 500 and closed down at 493, slightly below its 1998 and 2007 highs. The sharp decline destroyed its uptrend and started a new downtrend. The index is not adjusted for inflation and doesn’t consider dividends. If one netted a dividend yield of 2% against a roughly similar amount of inflation then the inflation adjusted total return since 1998 (when it was trading at 500 points) was zero for the stocks in the index. Finance theory teaches that stocks should provide an Equity Risk

2018-12-14T20:59:21-07:00December 14th, 2018|mayflowercapital blog|Comments Off on Stock Market Today Seriously Damaged By Broken Trendlines

Inflation Still Modest

    Yesterday the bond market priced in a 3 year inflation expectation of 1.4%. Today the CPI data was released: My favorite measure, core inflation, ex-shelter rose to 1.53%, near the 2016 high of 1.6%. I maintain that shelter is measured incorrectly, forcing those who live debt free to calculate a hypothetical cost as if they were paying market rent for their residence – ridiculous! The Fed’s PCE inflation measure tends to reduce this problem which is why PCE is usually 0.25% lower, although it could be even lower. YoY the core rate was 2.1%. Shelter was 3.2% YoY. Core commodities were up 0.2% YoY. The dominant economic paradigm of the past 30 years has been globalization where capitalists constantly

2018-12-12T17:28:56-07:00December 12th, 2018|mayflowercapital blog|Comments Off on Inflation Still Modest

Inverted Yield Curve Implies Recession Coming

     The yield curve has become inverted for the spread between the 2 year and 5 year Treasury. The entire yield curve has shifted to be close to being inverted. Traditionally it takes a long time, perhaps 1.75 years after yield curve inversion before a recession starts. However, since the 2008 GFC the extreme manipulation by central banks, such as the QE program, that have never before been experienced, means that things will not act as they typically do during a yield curve inversion. Assuming the short end of the yield curve (for maturities under two years) is heavily manipulated by central banks and less so the further out one goes from short term maturities, then the traditional metric that

2018-12-07T14:11:31-07:00December 7th, 2018|mayflowercapital blog|Comments Off on Inverted Yield Curve Implies Recession Coming

Stocks Crash: What Next?

    Stocks crashed hard today. The Russell Small cap index was down 4.43%, the SP down 3.24%. The ten year Treasury yield dropped to 2.91%, far below the recent high of 3.23%. The 10 - 2 Treasury spread narrowed to 10 bps, it had been in a range of 22 to 32 bps for the past year. At this pace the Treasury 10 – 2 spread will be inverted, a classic sign of a recession. Investing in stocks in the past decade has been dominated by the psychological aspects of technical trading, including “momentum”. But now momentum is broken, or soon will be. Many bullish investors may secretly feel stocks are overpriced and once the momentum trading turns against the

2018-12-04T13:20:31-07:00December 4th, 2018|mayflowercapital blog|Comments Off on Stocks Crash: What Next?