bubble

Can The Federal Reserve Prevent A Deep Stock Crash?

   The current stock market is a repeat of the irrational NiftyFifty stock market of 1973 with very high Price/Earnings ratios in the 1970’s which had nothing to do with low yields, bailouts, implied promises of Fed put options, corporate buybacks, QE, etc. – it was plain and simple irrational investor emotions in 1973 that created a stock bubble that lead to a crash. OK so the Fed did overstimulate in 1972 election but in those days it was a broadly dispersed benefit instead of today’s QE benefiting only stocks. It is tempting to feel a new era of permanently high PE’s has occurred but leaping to that conclusion is wrong as it is motivated by a desire to conform

2019-04-29T18:42:34-07:00April 29th, 2019|mayflowercapital blog|Comments Off on Can The Federal Reserve Prevent A Deep Stock Crash?

Stocks Hit New Highs: Should You Buy?

Today the SP index closed 2 points higher, (now at 2933) than the previous all-time high, which was in September, 2018. With the PE10 ratio at 31 this ratio shows stocks are priced at double fair value, implying that eventually stocks will crash 50% and stay down for a long time. It may be tempting to short sell stocks but as Keynes said, “stocks can go up longer than you can remain solvent”, so shorting is too risky. Since stocks are mostly bought by the affluent top 10% of society and these people are doing quite well in their careers then they can take their lucrative earnings and invest in stocks, thus fueling the bubble. But is it right to

2019-04-23T15:42:25-07:00April 23rd, 2019|mayflowercapital blog|Comments Off on Stocks Hit New Highs: Should You Buy?

Stocks Very High: When Will They Crash?

    Today the SP index of stocks closed at 2907, very close to the all-time high of 2940. It is tempting to wrongly leap to the conclusion that the ten year old economic cycle will never go into a recession and thus stock prices will grow infinitely upward. Junk bonds and similar junk quality loan assets continue to rise in price, implying the market thinks no crash is coming. As junk bond prices rise this makes their interest rate lower and thus attracts more borrowers, thus stimulating the economy. I have for a long time advocated that the tipping point in flipping over into a recession is the reduction of the availability of cheap, plentiful junk financing. If the supply

2019-04-12T16:44:34-07:00April 12th, 2019|mayflowercapital blog|Comments Off on Stocks Very High: When Will They Crash?

Central Bank Bubble Making: A Misleading Activity Worsening The Economy

   Don’t be fooled by the central bank’s ability to reflate the intangible financial economy and recover from a crash. If a crash occurs in financial assets then rhetorically speaking one can allege that prices are somehow unknowable or shrouded in an undiscoverable mystery so it’s somehow OK for central banks and governments to manipulate markets and artificially prop up asset prices. When stocks, bonds, real estate, and banks collapse, the central bank can print money and buy these assets at artificially high prices while the government and legislature can decree that “mark to market” accounting is suspended and that people must use the high water mark for valuation purposes.  This ability to create a miraculous “recovery” has fooled investors

2019-03-06T17:44:43-07:00March 6th, 2019|mayflowercapital blog|Comments Off on Central Bank Bubble Making: A Misleading Activity Worsening The Economy

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

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

2018-08-30T14:46:26-07:00August 30th, 2018|mayflowercapital blog|Comments Off on New Highs For Stock Market: Should You Buy Stocks?

Sociological Explanation for Rising Markets?

        The huge increase in PE ratios (double what is reasonable and traditional) along with the huge increase in debt to GDP ratio (also doubled) over the past 20 years requires an explanation. Of course, central bank policies encouraging growth of the money supply (part of which is connected to declining interest rates) were the main reason. Another reason may be a sociological one that in the past several decades there has been a tendency for high earning, degreed, credentialed professionals to get married to each other, whereas many decades ago there was a greater degree of married couples in a situation, where the spouse, usually the wife, had a non-professional, moderate income career. The benefit of

2017-10-24T09:58:35-07:00October 24th, 2017|mayflowercapital blog|Comments Off on Sociological Explanation for Rising Markets?

Thaler Wins Nobel Prize For Behavioral Economics

   Richard Thaler won the Nobel prize for work on Behavioral Economics. In my years of experience working with consumer/investors in finance I have been shocked how many well educated consumers made irrational financial decisions because of the gravitational tug of emotions, including peer pressure. I am shocked at how society tolerates huge, irrational, unjustified stock market bubbles. The establishment viewpoint about finance, the Efficient Market Hypothesis (EMH), assumes stocks are always fairly priced because everyone is presumed to be rational and diligent in investing. In reality many investors don’t study the market and instead allow peer pressure to push them into poorly thought through investment themes. If the EMH was correct then there never would have been a huge

2017-10-10T13:56:34-07:00October 10th, 2017|mayflowercapital blog|Comments Off on Thaler Wins Nobel Prize For Behavioral Economics

Cash On The Sidelines: Does It Justify High PE Ratios?

Fundamental analysis may look at PE ratios to define bubbles. But what should one do if the money supply has been drastically increased thus providing more funds for investors to engage in a bidding war to buy stocks? Does that mean that PE ratio guidelines should be expanded to accommodate the increased supply of money? Some fundamentalist advisors refer to the phrase “cash on the sidelines” as a false concept that can’t happen.  They assume that there is a finite amount of cash available to be traded between investors for shares of stock held by other investors and that on the aggregate that no new cash can appear on the sidelines and then be deployed into buying stocks. This would

2017-08-14T14:01:11-07:00August 14th, 2017|mayflowercapital blog|Comments Off on Cash On The Sidelines: Does It Justify High PE Ratios?

Greenspan Says Bonds Are A Bubble

          Alan Greenspan was quoted today saying that stocks are not a bubble yet he said bonds are. I strongly disagree. The traditional metric was that the ten year Treasury yield equals nominal GDP. Using PCE inflation around 1.6% and real GDP of 2.5% implies a 4.1% yield is needed. (But this metric was developed during the old days before the labor market became weak and before EM countries had huge Savings Gluts.) Contrast this with the current yield of 2.25%; the difference between 2.25 and 4.1% is 1.875%. Assuming the 1.875% difference is multiplied by the duration of 8.8 then the 10 year bond price needs to drop 16.5% to reach fair value. That is hardly a sign of

2017-08-01T14:32:46-07:00August 1st, 2017|mayflowercapital blog|Comments Off on Greenspan Says Bonds Are A Bubble