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Hedge Funds Are Failing: Regime Change

    A webinar by a prominent hedge-like mutual fund offered no good reason for their underperformance. I suspect they incorrectly assumed they were diversified, but they failed to realize that during a bubble, most assets have their correlation rise to be nearly fully correlated. The only quality diversification tools (especially during bubbles) are low duration Investment Grade bonds, or buying puts, etc. and thus they weren’t as diversified as they thought. They say their losses are in middle of the pack of peer group competitors but since they greatly underperformed a short term bond index (like the bond ETF AGG which lost 1.31% in 12 months, versus the 9.85% loss of a hedge-like fund in 12 months thru 9-30-2018) and

2018-10-19T17:29:14+00:00October 19th, 2018|mayflowercapital blog|0 Comments

Major Stock Crash; Bonds Improve

    Stocks crashed today, thus rescuing bonds, since yields dropped because of the stock crash. The 10 year Treasury yield dropped 1.6 basis points; in after-market trading the yield dropped even more (a total of 3.5 basis points), like a stone in water. The SP stock index dropped 3.3%; NASDAQ declined 4.08%. The VIX exploded up 44%, making it too hard for speculators to buy put options thus forcing sales of stock out of the hands of short term speculators. Much of the world’s stock indexes have been negative for the YTD. Looks like the U.S. market is moving towards a global stock bear market, as are bond yields. This morning the PPI inflation data was released showing inflation YoY

2018-10-10T14:00:35+00:00October 10th, 2018|mayflowercapital blog|0 Comments

Improving Labor Market Unlikely to Hurt Low Duration Bonds

    The BLS Employment report was released today showing 134,000 new jobs. Adjusting for 125,000 monthly population growth, of those likely to want to work, implies the net increase was only a few thousand jobs in a nation of 144million job holders and is thus a near zero growth rate. The unemployment rate decreased because less people attempted to participate in the workforce. When the unemployment rate is this high it is a sign of an overheated economy that will fall into recession in a year. Stocks may anticipate this a half year early so if recession come sin 12 months then stocks could crash in 6 months.    100% of the increase in employment went to those with no

2018-10-05T09:49:08+00:00October 5th, 2018|mayflowercapital blog|Comments Off on Improving Labor Market Unlikely to Hurt Low Duration Bonds

Bond Yields May Have Topped Out

    Yesterday’s dramatic bond market crash may make some people worry about rising rates, but I disagree. First, this year has seen an unusual degree of tax cut stimulus with huge federal deficits. This stimulus acted to make economic statistics including employment, hotter than normal, which resulted in rising interest rates. However, the typical scenario of a big stimulus package is a 5.5% GDP growth, not the 3.2% for the first half of 2018. The fact that the economy is growing 2% slower than it should (based on tax cuts) implies the stimulus may soon fade away and thus reduce the risk of inflation. During the two days before the monthly BLS Payroll Employment report bond yields tend to go

2018-10-04T12:56:32+00:00October 4th, 2018|mayflowercapital blog|Comments Off on Bond Yields May Have Topped Out

Interest Rates Up A Lot: Are Bonds Doomed?

  Today the yield on the ten year Treasury went up 0.12%, about three or four times the typical day’s movement. Reasons for yields to go up are that the economy is growing and experiencing rising wages and a shrinking jobless rate. Based on old cliché-like paradigms of the pre-2008 crash era the ten year bond yield should be the sum of inflation and GDP growth, about 4.5% total (today it's 3.18%). Also, the real yield should be about 2% (1% higher than today) which means, if inflation is 2.2%, then nominal yields should be 4.2%. So based on old-style fundamentals the ten year Treasury could go to a range of 4.2 to 4.5%. The effect of bond yields rising

2018-10-03T15:30:01+00:00October 3rd, 2018|mayflowercapital blog|Comments Off on Interest Rates Up A Lot: Are Bonds Doomed?

The Fed Raised the Rate Today: What Happens to the Economy?

             The Fed will keep on raising rates until they reach a level that makes them feel they have returned to normal. This means that real rates for short term rates, in the opinion of the Fed, ought to be about 2%, and if inflation is 2.2% then the Fed Funds rate could reach 4.2%, some 2% higher than today’s new rate. However, in their journey to higher rates they will find the economy is addicted to low rates and the economy will respond by falling into recession. Thus they will have to reverse course before they reach their goal. There is no way to go back to the past. To successfully return to the past when the ten year

2018-09-26T13:20:26+00:00September 26th, 2018|mayflowercapital blog|Comments Off on The Fed Raised the Rate Today: What Happens to the Economy?

Determining the Equity Risk Premium

    The Equity Risk Premium (ERP) is the excess return of stocks over Treasuries. It is used to show what the benefits of owning stocks are compared to bonds. A simple way to calculate it is to use the total return of long term Treasuries subtracted from stocks’ total return averaged out over a period of 30 or 40 years. The problem is that when stocks go up too high in a bubble this makes the ERP artificially high thus creating bubble that feeds on itself. Also when there is a period of severe inflation and high interest rates or extreme central bank tightening with very high rates then bonds may return more than stocks thus creating negative ERP. This

2018-09-05T16:51:13+00:00September 14th, 2018|mayflowercapital blog|Comments Off on Determining the Equity Risk Premium

Fair Trade and Laisse Fare Economics

   Trading with China may result in American companies submitting to the rigged rules of a non-free enterprise country that may result in an unfair outcome. It is interesting that American companies seek to move from high tax, high regulation states like California into low regulation states like Texas, yet they also want to open a branch in China and endure excessive regulations that may transition to a less secure situation if trading and tariff conditions worsen. I believe in free enterprise and in the optimism that if one country exports goods at a loss to another country that this ultimately won’t hurt the country that experiences too many low cost imports that result in a trade deficit. But this

2018-09-05T16:48:39+00:00September 5th, 2018|mayflowercapital blog|Comments Off on Fair Trade and Laisse Fare Economics

New Highs For Stock Market: Should You Buy Stocks?

   Earlier this week the SP made a new high after failing to do so for six months. However, the market’s breadth (of number of new highs vs. new lows) has shrunk to record lows, an extreme and dangerous sign. Only 3 sectors of the SP made new highs this week, versus 7 in January’s peak. The extreme price appreciation of the FANGs stocks has warped the averages. Corporate earnings before tax were up 0.2% a year since their peak in 3rd quarter 2014, which means in inflation-adjusted terms profits have been shrinking. In order to have a healthy and fairly priced market I’d like to see earnings increasing consistently and robustly for each of the last 16 quarters, instead

2018-08-30T14:46:26+00:00August 30th, 2018|mayflowercapital blog|Comments Off on New Highs For Stock Market: Should You Buy Stocks?

Declining Yield Curve Spread Hints at Recession

    The yield curve spread between 2 year Treasury bond and ten year is 21.5 basis points, it was about 25 a week ago, and is consistently dropping to new lows not seen since last economic top of 2007.  Economists say that a declining spread eventually moves the yield curve to inversion which is a symptom of recession, and partly a cause of it.     Global rates have already inverted as have some domestic esoteric short term bond swap contracts for 2 and 4 year maturities. The old paradigm that the ten year Treasury yield is the same as nominal GDP hasn’t worked since 2008 crash because a new world exists where major regions such as the EU and Japan

2018-08-23T15:11:59+00:00August 23rd, 2018|mayflowercapital blog|Comments Off on Declining Yield Curve Spread Hints at Recession