stock market Archives - Independent Investment Advice Blog | Investment Planning

Complex Theories May Confuse You About The Stock Market’s Hidden Risk

In the 1997-2007 mortgage housing bubble the enablers of the bubble tried to rationalize using the Gaussian Copula theory that a Mortgage Backed Security holding mortgages from different states would act diversify the risk of a default. But that rationale was wrong because it was assumed that the successful borrowers would offset the damage caused by the losers. Instead the winners, who are borrowers, are not obligated to bail out the loser or to pay extra to the lender to make up for the loss caused by the defaulting borrower, so the “diversification” was bogus. A similar phenomenon is happening where financial experts assume the central banks can bail out the economy by cutting rates deeply. The problem is

Don Martin2019-06-19T17:06:19-07:00June 19th, 2019|mayflowercapital blog|Comments Off

If Stocks Crash Can The Federal Reserve Repair The Damage?

When the recession comes, stocks will go down. The Fed can’t cut rates enough to prevent or heal a crash. Typically the Fed needs to cut rates by 5% in a crash; since they are now at 2.4% they would have to go to negative 2.6% which can’t be done without destroying the economy, and thus it won’t be cut to a negative rate. The intrinsic value of the SP is 1,800 (the peak was 2,954); the intrinsic value of the SP could even be as low as 1,100. If the Fed can only provide about half of the rate cuts needed to heal the next crash then perhaps stocks would get stuck at halfway between intrinsic value and

Don Martin2019-05-16T13:33:54-07:00May 16th, 2019|mayflowercapital blog|Comments Off

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

Don Martin2019-04-29T18:42:34-07:00April 29th, 2019|mayflowercapital blog|Comments Off

Incorrect GDP Fools Investors

Today the GDP quarterly data was released showing a surprisingly strong 3.18% increase. Yet bond yields declined, implying the bond market thinks the economy is slowing down. Harald Malmgren on Twitter said the BEA used an inflation rate of 0.64% to calculate a “real” GDP of 3.18%. If the BEA used the CPI (done by the BLS) of 2.27% the GDP would be 1.56%. In my opinion one should use the PCE inflation index of 1.3%, less a 0.25% downward adjustment for errors in the contrived “Owner’s Equivalent Rent” housing cost index, making inflation 1.05%, some 0.4% higher than what was used to calculate GDP. If my method was used then real GDP would be 2.78%, lower than some of

Don Martin2019-04-26T15:19:59-07:00April 26th, 2019|mayflowercapital blog|Comments Off

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

Don Martin2019-04-23T15:42:25-07:00April 23rd, 2019|mayflowercapital blog|Comments Off

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

Don Martin2019-04-12T16:44:34-07:00April 12th, 2019|mayflowercapital blog|Comments Off

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

Don Martin2018-12-04T13:20:31-07:00December 4th, 2018|mayflowercapital blog|Comments Off

Stocks Crashed Today: Should You Buy Gold?

Stocks crashed hard today, the NASDAQ was down 4.4%, the most in 7 years. Yet gold, which many people think is a hedge, only went up 0.22%. I believe the intrinsic value of gold, based on inflation indexes, is roughly $800, some $436 below today’s price of 1,236. Thus in theory gold should first need to drop to a “cleansing crash” bottoming out price of $800 and then later, during a recession, a new round of inflationary stimulus will make it go up. To generate massive inflation society would first need to go through a dramatic, deep recession that would trigger bipartisan demands for aggressive reflation. Thus it is way too early in the cycle for gold to go

Don Martin2018-10-24T14:42:00-07:00October 24th, 2018|mayflowercapital blog|Comments Off

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

Don Martin2018-09-05T16:51:13-07:00September 14th, 2018|mayflowercapital blog|Comments Off

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

Don Martin2018-09-05T16:48:39-07:00September 5th, 2018|mayflowercapital blog|Comments Off