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|0 Comments

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

Stock Buybacks: How They Damage Companies

     When corporations buyback shares of publicly traded stock the opinion of most experts is that it does no harm. I think on a small scale this could be partly true, but on a macro scale, if every company does buybacks and if buybacks act to raise the price of a stock then the companies’ actions in the aggregate can create a momentum driven bubble for the entire market, which is harmful. It is analogous, in an inverted mirror image way, to the fallacy of composition argument where during recessions even though it is best for each individual to save money and avoid household deficits, if everyone saves at the same time, then there will be a disruptive reduction of

2018-08-13T12:24:27+00:00August 13th, 2018|mayflowercapital blog|Comments Off on Stock Buybacks: How They Damage Companies

Inflation Data Implies Fed Almost Done Tightening

   Today the CPI data was released with the core rate for 12 months up 2.4%. Housing increased 3.5%; if housing is multiplied times its 40% weight that would be 1.4 percentage points of the 2.9% overall non-core CPI, so CPI ex-housing is 2.9% minus 1.4 = 1.5%, and would be even lower if the figure was ex- food and energy. The problem with housing CPI is the Owner’s Equivalent rent is miscalculated by non-landlords who are unfamiliar with rental rates and who let their emotions of pride about their house leap to conclusions about imputed rent they are not actually paying; further these people may own their house free of debt or they may have a fixed rate mortgage,

2018-08-10T15:58:23+00:00August 10th, 2018|mayflowercapital blog|Comments Off on Inflation Data Implies Fed Almost Done Tightening

Inflation May be Cooling Down

The expected inflation “breakeven rate” for 5 year TIPS Treasuries rose in a trend line from 1.5% in mid-2017 to 2.17% and then last month the trend line was broken, and now it is down to 1.98%. Residential construction spending decreased 4 of last 5 quarters; the last time it happened was at the bottom in the 2008-2010 period.  Read the article “Housing Sours Suddenly; It Won't Come Back Anytime Soon”. Much of the news about an inflationary shortage of workers concerns low payed semiskilled workers, but these types often earn so little that they can’t effectively use their paycheck to qualify for a big, attractive “A” paper loan that would increase the money supply and thus cause inflation. What

2018-08-09T11:57:35+00:00August 9th, 2018|mayflowercapital blog|Comments Off on Inflation May be Cooling Down

Will Apple be the First $Trillion Company?

  If Apple reaches $203 (only 1% higher than today’s price) it will be the first U.S. $Trillion Company, however, the first global one occurred in October, 2007 in China when PetroChina (PTR) reached a peak of $262 a share. Now PTR is at $74 a share, a decline of 72% from the peak of a decade ago. I bought PTR in March, 2005 at $62 and sold it November, 2006 at $116. I sold because I was worried (too early) that oil and PTR were going up too far and might plunge suddenly. Instead oil went higher, peaking in July, 2008. I don’t regret getting out too early because the downside risk of a volatile oil stock is great.

2018-08-01T16:06:39+00:00August 1st, 2018|mayflowercapital blog|Comments Off on Will Apple be the First $Trillion Company?

GDP Rise Today Not A Sign of Better Economy

    GDP for the 2nd quarter was reported today at 4% annualized. However, if one subtracts out the temporary boom in soybean exports done to avoid new tariffs, the lumpy defense spending, and a savings rate draw down that facilitated excessive consumption, then the GDP, ex-those items, was up only about 2.3%, which is what it has been for several years. The bond market actually reduced yields today after the news was released, so bond traders feel it is the same old story of a GDP stuck at 2.3% in the past few years (or about 1.4% over a ten year cycle). Regarding GDP growth, John Hussman @hussmanjp tweeted: “Basic arithmetic is your friend. Aside from quarterly pops in real

2018-07-27T16:13:05+00:00July 27th, 2018|mayflowercapital blog|Comments Off on GDP Rise Today Not A Sign of Better Economy

Tech Giant Plunges 23% Is This the Top?

Today’s 23% plunge in the price of Facebook stock is no surprise since it is one of the high priced tech stocks in the FANG index. If this can happen to a company with decent earnings then imagine how much riskier are the razor thin earnings companies like Amazon or money losing tech companies like Netflix. What has been propping up the entire market are the ten FANGS companies, so when they start to drop steeply in price then the momentum will soon be or now has been broken for the entire market. Already the broad market has failed to make a new high for six months.    The ECRI leading index peaked before every recession in 50 years. It

2018-07-25T17:08:43+00:00July 25th, 2018|mayflowercapital blog|Comments Off on Tech Giant Plunges 23% Is This the Top?